• About Us
    • Our Team
    • What We Offer
    • Process
    • Success Stories
    • Newsletter Signup
  • Partner With Us
    • Accounting Firms
    • Financial Advisors
    • Consultants
  • SR&ED Tax Credit
    • SR&ED Calculator
    • SR&ED Planning
    • SR&ED Filing Deadlines
    • SR&ED Reviews
    • SR&ED Free Webinars
  • Industries We Service
  • IRAP Funding
  • Recent News
  • 1-416-499-2861
  • info@braithwaite.ca
Free Consultation
  • About Us
    • Our Team
    • What We Offer
    • Process
    • Success Stories
    • Newsletter Signup
  • Partner With Us
    • Accounting Firms
    • Financial Advisors
    • Consultants
  • SR&ED Tax Credit
    • SR&ED Calculator
    • SR&ED Planning
    • SR&ED Filing Deadlines
    • SR&ED Reviews
    • SR&ED Free Webinars
  • Industries We Service
  • IRAP Funding
  • Recent News
Twitter
Linkedin
Facebook
Envelope
  • 1-416-499-2861
  • info@braithwaite.ca
Free Consultation
  • About Us
    • Our Team
    • What We Offer
    • Process
    • Success Stories
    • Newsletter Signup
  • Partner With Us
    • Accounting Firms
    • Financial Advisors
    • Consultants
  • SR&ED Tax Credit
    • SR&ED Calculator
    • SR&ED Planning
    • SR&ED Filing Deadlines
    • SR&ED Reviews
    • SR&ED Free Webinars
  • Industries We Service
  • IRAP Funding
  • Recent News
Twitter
Linkedin
Facebook
Envelope
All  ·  CRA  ·  SR&ED

Understanding The Importance of an Intellectual Property (IP) When Claiming The SR&ED Tax Credit

By admin  Published On November 22, 2021

A question we are frequently asked at Braithwaite Canada is about a company’s Intellectual Property (IP): If I own my IP or if my IP is owned by a subcontractor or third-party (university), can my company still apply for the SR&ED Tax Credit? In short, the owner of the IP will be the one eligible to make the SR&ED claim for the work done to generate the IP. To figure out who the owner of the IP is, we must know more about the terms of the contract between the involved parties. This is where we will find the differences between IP ownership with a subcontractor and with a third-party (university).

If a university owns the IP, can my company still claim the SR&ED Tax Credit?

Typically, in this scenario, the company is also performing/planning to perform their own SR&ED when they engage with the university. So, the answer is yes because the company will claim their own SR&ED work, not the university’s SR&ED work (even though they’re paying for it). The company can include the payment made to the university as an eligible expense because it’s a third-party payment (per sections 2.1 (and 2.1.2) in CRA’s Third-Party Payments Policy). Section 5.0 in this policy provides some more detail:

5.0 Entitlement to exploit the results “To be entitled to exploit the results of the SR&ED, a claimant must have gained the right to use the results of the SR&ED in their business as a direct result of the payment. Whether a claimant is entitled to exploit the results of the SR&ED is a question of fact and will be determined on a case-by-case basis”.

5.1 Two basic situations & 5.1.1 Resulting in a product or patent “If the SR&ED results in a product or patent, then this requirement could be satisfied if the claimant has the right to use a resulting patent (even for a royalty), or where the claimant is entitled to distribute or market any resulting product. If the claimant cannot use the patent or can only obtain the product through normal commercial channels, this requirement would not be satisfied”.

5.1.2 Resulting in a gain of knowledge “If the SR&ED does not result in a product or patent, but results in a gain of knowledge (such as by publication of a scientific paper), then one way this requirement could be satisfied is if the claimant has, as a consequence of the payment, been granted a preferential right to use the results of the SR&ED (the knowledge gained) in its business. A preferential right could be access to unpublished results or early access to results. If results are presented at a conference or published in a journal, this requirement could be met if the sponsor received a pre-publication print of the paper. If the results of the SR&ED are in the public domain before the sponsor receives them, then that would not be considered to be a preferential right”.

5.2 Payer must be entitled “To meet the requirement of being entitled to exploit the results of the SR&ED, it is the claimant making the third-party payment who must be entitled to exploit the results of the SR&ED.”

Section 3.0 of the same policy adds another requirement: “To be considered as a third-party payment, a payment made by the claimant must be for the purposes of SR&ED. The claimant’s obligation is to show that the payments are made for SR&ED. Third-party payments must be made only for SR&ED work.”

Most commonly, our clients meet the requirements in sections 3.0, 5.0, 5.1.2, and 5.2. These terms are typically defined in their agreement with the university/third party. Our clients use the results of the university’s SR&ED towards their own SR&ED work. Our client can make an SR&ED claim for their own SR&ED work (separate IP), not the third-party’s work. Our client includes the third-party payment in their SR&ED expenses.

Aside:
If the third party wants to make an SR&ED claim, they will describe their own work in their claim. No double-dipping of ITCs as per CRA’s Assistance and Contract Payments Policy. Section 4.3.2: “Qualified SR&ED expenditures are reduced by any assistance and contract payments that can reasonably be considered to be in respect of the SR&ED.” and 5.1 “Where a Canadian claimant contracts to have SR&ED carried out on its behalf by another party, the amount payable under the contract may be a qualified SR&ED expenditure for investment tax credit (ITC) purposes […] For the Canadian party performing the contract (the contractor), the contract payment reduces the qualified SR&ED expenditures for ITC purposes. In this way duplication of the ITC is avoided.“

When our client owns the IP (or some of the IP) of the contracted SR&ED work, it becomes a contract expenditure.

Sections 10.0-10.1.3 of CRA’s Third-Party Payments Policy talks about the differences between third-party payments and contract expenditures. From discussions with reviewers, they use these criteria, in addition to 5.0-5.2 above, and focus a lot on 10.1.2 to help figure out the difference and who owns the IP of the SR&ED work:

10.1.2 Rights “In a contract situation, SR&ED services are performed for a payer who receives the rights to the SR&ED. The entitlement to the SR&ED tax incentive occurs at the time the SR&ED is performed. In comparison, a third-party payment situation gives the payer entitlement only to the results of the SR&ED.“

Client Scenario 1 (associated companies)

In the first example, Company A and Company B are associated companies, so no contracts were involved. In this claim, Company A’s employees performed support work for Company B’s SR&ED, and ownership of the work’s IP was not an issue here. We were able to claim this work, as CRA’s Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy section 7.4 states: “However, subsection 37(13) of the Income Tax Act deems the support work of a NAL performer to be SR&ED provided that the support work would be SR&ED if it were performed by the payer.“

In the First-Time Claimant Advisory Service (FTCAS) (for both companies at the same time), the RTA and FR agreed with this. The future claims continued with Company B because their team grew and didn’t need the extra resources from Company A.

Client Scenario 2 (arms-length subcontractor)

For the second example, Company A was an arms-length subcontractor for Company B and Company C, and section 3.0 in that same policy provides a good starting point: “Whether the payer requested the contractor to perform SR&ED on behalf of the payer under the terms of the contract is a key element for determining an amount as being a contract payment. This determination is made on the basis of the terms of the contract read as a whole and by reviewing all the facts surrounding the particular situation.” Per CRA, “on behalf of a claimant” “normally refers to a situation where the SR&ED work is contracted out to another party under circumstances where the claimant (the payer) typically maintains ownership of the SR&ED work performed.“

When speaking with Company A, the client said the terms of his contract with Company B, and Company C stated that he owned all of the IP of all of his work. He also said the scope of his work was not solely SR&ED, nor was it defined as such in the contract. Company B and Company C have access to the finished product but not to how it was developed (the SR&ED). Company B and Company C did not perform any SR&ED-eligible work. Looking at Section 3.0 of CRA’s Third-Party Payments Policy, it says “When a payment is made for a combination of SR&ED work and non-SR&ED work, the payment will not qualify as a third-party payment.” In this case, the CRA policies would find: (1) Company A wouldn’t have performed SR&ED for or on behalf of Company B and Company C, but rather for himself, (2) Company B and Company C couldn’t use this expense as a contract payment or third-party payment, and (3) Company A is the party that can make an SR&ED claim for the ITCs.

In Summary

  • The owner of the IP makes the SR&ED claim for the work done to generate the IP.
  • We need to understand if the contract defines the scope of the subcontractor’s/third-party’s work. Does it define requirements for SR&ED work? Does it include non-SR&ED work? if yes, then it cannot be a third-party payment. Who owns the IP of the SR&ED work? contract payer or contract performer?
  • An intention for filing an SR&ED claim by either party (especially important if the payer is not performing any SR&ED work).
  • If it’s a third-party payment; the payer only has rights to the results of the third-party’s SR&ED work. The payer can make an SR&ED claim for their own SR&ED work and can include the payment expense.
  • If it’s a contract payment and the payer owns the IP of the contractor’s SR&ED work; then the payer can make the SR&ED claim for their SR&ED work AND the subcontractor’s. The subcontractor cannot make an SR&ED claim for this work.
  • The subcontractor owns the IP of the SR&ED work; then only they can make the SR&ED claim for that work. Contract payment reduces the subcontractor’s qualified SR&ED expenditures for ITC purposes.

For more information on IPs in relation to the SR&ED Tax Credit or how Braithwaite Canada can assistance you with your companies next SR&ED Tax Credit Claim, please contact us today.

Sources:
Government of Canada – Third-Party Payments Policy
https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/third-party-payments-policy.html

Government of Canada – Assistance and Contract Payments Policy
https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/assistance-contract-payments-policy.html

Government of Canada – Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy
https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/contract-expenditures-performed-on-behalf-a-claimant-policy.html#s7_0

Government of Canada – SR&ED Glossary
https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#nbhlf

Get Innovation Funding Today

Engage our experts to optimize your SR&ED claim process, manage the compliance burden and reduce uncertainty
Contact Us

Intellectual PropertyIPSR&ED

Related Articles


All  ·  SR&ED
Determining Uncertainty? What is the SR&ED Technological Uncertainty?
December 20, 2021
All  ·  CRA  ·  SR&ED
The Federal Budget – The Braithwaite ‘Take’ for SR&ED Tax Credit
April 13, 2022
All  ·  Construction & Engineering  ·  Manufacturing
Why you NEED to hire Braithwaite as your Manufacturing SR&ED Consultant
November 3, 2021
Remembrance Day; Lest We Forget
Previous Article
Determining Uncertainty? What is the SR&ED Technological Uncertainty?
Next Article

NAVIGATION

SR&ED Tax Credit
SR&ED Calculator
SR&ED Planning
SR&ED Filing Deadline
SR&ED Reviews
IRAP Funding
Industries We Service

NAVIGATION

Our Team
What We Offer
Process
Success Stories
Newsletter Signup
Recent News
Contact Us

CANADA

900-2235 Sheppard Ave E
Toronto, ON M2J 5B5
Office: 1-416-499-2861
Email: info@braithwaite.ca
eFax: 1-437-889-0955

IRELAND

28-32 Upper Pembroke Street
Dublin 2, D02 EK84
Office: +353 1 234 2517
Email: info@braithwaite.ie

Twitter
Linkedin
Facebook
Envelope
© Braithwaite Technology Consultants Inc 2022. All rights reserved.
Privacy & Cookie Policy
CACCEPT
Manage consent

Privacy Overview

We use necessary cookies to enable you to move around our website and use its features. You may disable these by changing your browser settings, but this may affect how our website functions.
We would also like to set optional analytics cookies to help us improve our website by collecting and reporting information on how you use it. However, we will not set these cookies unless you enable them by using the on/off tool below and click the save and close button. Using this tool will set a cookie on your device to remember your preferences.

For more detailed information about the cookies we use, see our Cookies Policy.
You can give or withdraw your consent at any time by clicking the ‘C’ icon at the bottom left of the website.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.

SAVE & ACCEPT