We have covered a lot of helpful information for SR&ED in the previous blogs. However, there are still some important terms to explain in detail because the glossary provided by the Canada Revenue Agency (CRA) often seems difficult to understand for SR&ED applicants. Understanding the CRA terminologies will help you conduct SR&ED projects efficiently, and the possibility of review or rejection will be much lower.
One of the eligible expenses for SR&ED is the contract expenditure, and the terms arm’s length and non-arm’s length refer to two types of contractors. Arm’s Length contractors are independent and do not have any personal or blood relationship with the applicant and applicant’s shareholders. It ensures that both parties act in their self-interest and are not subject to any pressure from the other party. In contrast, Non-Arm’s Length contractors are not independent and may receive support from the applicant. Please remember that arm’s length contractors qualify for investment tax credits, while Non-Arm’s Length contractors don’t.
Canadian Controlled Private Corporation (CCPC)
A Canadian Controlled Private Corporation (CCPC) is a private corporation that Canadian residents control. A corporation will not qualify as a CCPC if registered on the stock exchange or has ownership in a foreign country. When applying for SR&ED, the main difference between CCPCs and non-CCPCs is that CCPCs are eligible for refundable tax credits, while non-CCPCs only qualify for non-refundable tax credits.
Investment Tax Credit (ITC)
Investment tax credit (ITC) is basically a tax-related incentive that allows individuals or entities to deduct a certain percentage of specific investment-related costs from their tax liability. As SR&ED is one of the projects in Canada that offer ITCs, there are several related terms to be clarified.
According to the SR&ED policy, applicants can carry back their ITCs available in the current tax year and apply them to any three previous tax years. Thereby, carrying back ITCs can benefit if taxes are owed in prior years.
The SR&ED policy also states that ITCs may be carried forward and applied to future taxes owed in the following years. Carrying forward ITCs can be beneficial if the SR&ED refund is not needed immediately or if carrying back is unnecessary.
As discussed many times before, an eligible SR&ED project needs to overcome scientific or technological uncertainties and achieve scientific or technological advancements. However, the SR&ED claim may still be rejected if the work performed was not conducted in a “proper” way. In this case, the proper way means following the scientific method, or in other words, the systematic investigation. The structure below is a perfect example:
- Carry out the hypothesis;
- Test the hypothesis through experiments;
- Analyze the test results;
- Draw conclusions.
If applicants are willing to know more related terms about SR&ED, the complete version of the Glossary can be found at: