When companies develop new products, be it software, machinery, consumer goods, or technology, it is not unusual for the corporation, particularly SMEs, to hire a contractor to perform some or all of the work. Historically, over 90% of the time, these corporations claimed SR&ED tax credit and everyone was happy. However, as we all know, today Canada is quickly emerging as a hotbed of research and development activity, where companies in some of the most dynamic technology fields are making their presence increasingly felt. These fields include Artificial Intelligence, Fintech, Health-tech, and almost “Everything-tech”.

Therefore, the SR&ED program is certainly a tax credit well on the radar of every contractor and – as you guessed it –on those of businesses who hire contractors. There have been instances, whereby a business hires a developer as a contractor, who, unexpectedly but legitimately, ends up with the rights to claim for the SR&ED benefits. Because SR&ED is a lucrative tax credit for all businesses and contractors performing R&D, the question arises as to:

Who Gets to Claim the SR&ED? Whose SR&ED is it Anyway?


In a perfect world, the answer would be articulated clearly in the contract. Unfortunately, your contract may not explicitly identify the owner of any SR&ED work, or there may not be a formal contract. Furthermore, simply having a contract in place outlining this issue may not be sufficient in CRA’s view when the time comes to review your claim. As we will explore below, CRA does not offer guidance on assessing contract terms for the purposes of SR&ED eligibility as they pertain to the allocation of “SR&ED rights” in the contract. For this reason, it is important to understand the criteria that CRA uses in evaluating who is entitled to SR&ED investment tax credits (ITCs).

CRA defines how SR&ED is performed—“a systematic investigation or search that is carried out in a field of science or technology by means of experimentation or analysis for the advancement of scientific knowledge”. It also qualifies SR&ED activity as achieving technological advancement aimed at creating new, or improving existing, materials, devices, products and processes.

How Can I Tell?

The overarching issue here is whether a payment from a business to a sub-contractor can be considered a contract payment for SR&ED. If such a payment IS considered a contract payment for SR&ED, then the payor (the business) has the right to claim the payment and obtain the resulting ITCs. In this scenario, the payee (the contractor) may also have the right to claim his/her own internal costs related to the work, but when it comes to calculating the ITCs he/she would be required to net the SR&ED contract payment amount from his/her eligible expenditures. In many cases, the SR&ED contract payment exceeds the contractor’s own internal expenses on the job, effectively rendering any efforts to claim SR&ED credits worthless.

The CRA uses four key criteria, considered equally, to determine whether an amount paid by a business to a contractor is indeed a SR&ED contract payment. CRA states that “An analysis is required of all circumstances relating to the payment to determine if the amount is to be treated as a contract payment.” As CRA puts it: “The question is not whether SR&ED work was carried out, but whether SR&ED was carried out because it was required under the contract.”

The Risk Factor

In cases where a contract does exist between the contractor and the business, the following question needs to be addressed: Is there a ‘ceiling price’ or ‘flat fee’ beyond which the contractor would not be paid in the production of the work product? Who is going to account for the costs of all those repeated trial and errors? If there is a flat fee, or ceiling price, the contractor is assuming the risks associated with producing the product. There is a case to be made that SR&ED, in this case, belongs to the risk taker: the contractor. Conversely, if the contract allows for unforeseen costs, cost over-runs, or extended time and material for failed versions, the business is assuming risk and the SR&ED work likely and rightfully belongs to the risk taker: the business.

What Work Does the Contract Require?

If the contract states that the contractor is required to perform specific research and development activities to solve particular technological challenges on behalf of the business, or meet particular specifications, this can be an indicator that the SR&ED was performed on behalf of the business.

Is the Contract For a Service, or For a Product?

A contract for a service implies that the business can claim SR&ED costs, if SR&ED activity was performed on behalf of the business in offering the service.

If it is a contract for a product, this implies that SR&ED work was not performed for the business and, therefore, the contractor can claim the SR&ED costs, and the business owns the product only. However, as stated above, if the product contract contains language about how the product is produced, tested, and verified, there is an argument to be made that the business not only owns the product under contract, but also can claim the SR&ED costs.

Who Owns the Resulting Intellectual Property?

Most contracts have terms surrounding the ownership of the resultant IP. If the IP rights rest with the contractor, this may indicate that they were the ones required to perform SR&ED. The same goes for cases whereby the business paying for the service only has conditional rights to use the results of the research, since the payer does not have full freedom to exploit the results as it sees fit. In some cases, it may be advisable to make a distinction with respect to the different levels of IP that make up the work product; it is possible for a payor to own the IP to the overall product implementation (for example, in a software application) while the contractor retains the rights to the underlying inner workings and technological building blocks of the product. It is worth noting, however, that the Income Tax Act does not require that a SR&ED claimant have exclusive IP rights to the results of SR&ED to be eligible; IP ownership is only one factor of consideration in a holistic analysis of contract terms. So for either the employer or the contractor, a lot of it largely boils down to choosing the right consultant.

Geography Matters

Of course, all of this analysis is moot in the event that one of the parties involved, either the paying business or the contractor, is not eligible for SR&ED ITCs by themselves. This can occur when one of the parties is not a Canadian taxable supplier. For example, if a business contracts a company outside of Canada to carry out SR&ED on their behalf, this cannot be claimed at all. Conversely, if a contractor is hired by a business outside Canada, it is not possible to account the payment as part of a SR&ED contract. However, even though they are not eligible to claim their own SR&ED ITCs, payments made by a Canadian government, municipality or public authority CAN be considered SR&ED contract payments.

Finally, a word of advice for contractors and hiring businesses: Have a discussion at the beginning of the contract about who can claim SR&ED, and make sure SR&ED work ownership is explicitly articulated in the various aspects of the contract outlined above. For over three decades, we have consulted thousands of clients in the design of contracts that protect their SR&ED ownership. Don’t miss an opportunity to discuss with us the above issues before making a decision.

Paul Anderson works in business development for RDP Associates in Toronto. For information about your SR&ED and government funding needs, contact Paul:

[email protected]
(416) 368-9341 x.299