Canadian businesses of all types can claim research and development tax incentives through the SR&ED Program; but it’s not just the type of research work that you’ve been doing that counts — your business structure for tax purposes matters too.
One of the key obstacles that we encounter, and that businesses need to be aware of, is how your business structure impacts your ability to claim potentially lucrative Investment Tax Credits (ITCs) through the SR&ED program.
Businesses that are legally structured as partnerships are not excluded from being able to submit SR&ED claims to earn ITCs. However, partnerships participating in the SR&ED program may find the process significantly more complex compared with normal Canadian Corporations. Key differences in the treatment of partnership entities may result in reduced benefits. It is vital to consider these prior to making a claim for SR&ED expenditures and credits.
Being aware of these crucial differences can ensure your business can access the maximum benefits possible.
Partnerships and SR&ED
At first glance, the tax rules around partnerships can be highly complex. That’s because the Income Tax Act does not define a partnership, it simply outlines the tax consequences if a partnership exists.
A Canadian partnership entity can be formed between individuals, corporations, trusts, or other partnerships, in any combination. However for SR&ED purposes, the Canada Revenue Agency considers that SR&ED work is considered to have been performed by the collective partnership and not by one of the individual members of the partnership.
The key difference for partnerships is that SR&ED is less generous, providing a reduced ‘Basic Investment Tax Credit rate’ of 15% of qualifying expenditure. This is in contrast to regular private Canadian Corporations, who are eligible for the ‘Enhanced’ rate of 35%. For partnerships, this reduced ITC rate of 15% is also only partially refundable; where a partnership has no tax owing in the year, only 40% of the 15% total ITC may be refunded.
The collective partnership itself cannot earn these ITCs. While the ITCs are calculated at the partnership level, they are actually allocated to the individual partners based on eligibility. This eligibility can vary between different member entities. Understanding the distinguishing factors between these is critical when a partnership is attempting to claim SR&ED. Engaging a specialist tax consultant may be necessary when getting to grips with this.
Businesses belonging to partnerships that are performing SR&ED should review their status and involvement prior to submitting any SR&ED claims, in order to avoid any complications with the CRA. The need to do so will be particularly important for members who, despite investing significant time and money in a partnership, find they still can’t claim SR&ED ITCs because of the type of partner they are classified as.
For more information about how corporate partnerships can affect SR&ED, as well as information on the tax incentives that may be available to your business, you can reach Richard Hoy at Richard.Hoy@catax.com.