As most advisors know, the SR&ED tax credit program applies to a wide variety of industries and businesses. Our experience is that work involving medical research generally meets the SR&ED tax credit criteria as many technological uncertainties need to be resolved and as a result, technological advancements are made. This means, medical professional corporations (MPC’s) are eligible for SR&ED.
Issues Raised by CRA Regarding SR&ED Claims by MPCs
Over 10 years ago we were surprised when CRA raised a few serious issues regarding SR&ED claims made by certain physicians through their MPC. These issues did not relate to whether the SR&ED projects claimed met the criteria, but rather a) was the SR&ED work directly undertaken by the MPC, and if so b) did amounts received by the MPC in the form of certain provincial payments such as an AFP/APP (Alternative funding arrangements) in Ontario, require these payments to offset SR&ED expenditures?
In the first case, the issue raised was whether the MPC had the right to directly undertake the SR&ED work. Here CRA was trying to argue that physicians who had an appointment at a hospital (especially teaching hospitals) were bound to carry out R&D under the arrangement with the hospital. On this basis, the physician/MPC did not directly carry out SR&ED and therefore did not meet the strict wording within s37 (1) (a) (i) of the Tax Act. This argument caught us by surprise. In most cases, a hospital does not dictate that a physician, with an appointment, carry out specific R&D work, unless the physician is on the hospital’s payroll.
Secondly, CRA’s position was that (in addition), if the MPC received alternative funding payments like AFP/APP in Ontario, these receipts were considered government assistance/contract payments and were required to be netted against SR&ED expenditures.
There was a period in the ensuing years, from when the issue was first raised, that CRA carried out a number of reviews of MPC’s SR&ED claims and denied many claims on the basis of the above.
CRA’s Guidelines for SR&ED Claims by Medical Professionals
Fortunately, a few years later, CRA issued guidelines for physicians and medical professionals making SR&ED tax credit claims. While the guidelines are very helpful, there is still a degree of judgment and planning required to safely file an SR&ED tax credit claim to ensure the guidelines are adhered to, especially if an agreement exists between the physician/MPC and hospital or university.
Best Practices for Agreements Between MPCs and Hospitals
At the core of it, any agreement between the MPC and another party (such as a hospital) should clearly indicate that the MPC is not bound to undertake SR&ED on behalf of the hospital or university. It is also helpful if the MPC is referred to in the agreement and not the specific physician.
As agreements between physicians and hospitals/universities differ widely, it is a good idea to have these agreements reviewed by a professional. RDP has considerable experience in this area and can provide guidance.
Considerations for Alternative Funding Payments
On the issue of alternative funding payments, care, and judgment must be taken here as well, as the typical funding arrangements can vary and generally are not very specific when it comes to SR&ED work. In other words, the funding arrangement may be vague as to what portion of payments relate to SR&ED work, if at all. Here, reasonable allocations need to be made whether there is a link between the alternative funding payments received and the SR&ED work carried out.
Again, RDP has considerable experience in this area. If you have a client who is an MPC, or you are a medical professional carrying out SR&ED work (in an MPC) we would be pleased to discuss your SR&ED tax credit claims with you.
Further Reading and Resources
For more information on making a SR&ED claim as an MPC, click here to read this guidance from the Federal Government.
To read some previous interviews and blog posts on innovation in healthcare please follow the links below:
Joseph Cafazzo on Digital Health in Canada
What can you do to accelerate Adoption of Innovation in Healthcare?