Developments: Are You Losing SR&ED Benefits? — Effect of Conditionally Repayable Loans

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If your corporation uses conditionally repayable loans to fund scientific research and experimental development (SR&ED), it may lose valuable tax benefits.

Background
Taxpayers that incur qualifying expenditures to undertake SR&ED in Canada may be able to:

• deduct these expenditures in computing taxable income; and
• claim federal and provincial SR&ED investment tax credits (ITCs) on them. All provinces (except Prince Edward Island) and the Yukon offer SR&ED ITCs.

However, qualifying SR&ED expenditures must be reduced by government assistance in the year the assistance is received, entitled to be received or can reasonably be expected to be received. The position of the Canada Revenue Agency (CRA) is that conditionally repayable loans are a form of government assistance and, therefore, reduce the taxpayer’s SR&ED deduction and ITC claim.

• the lost SR&ED deduction (both federal and provincial); and
• the lost federal SR&ED ITC,

but, depending on the provincial rules, the provincial ITC may still be lost. For example, in both New Brunswick and Nova Scotia, the 15% refundable ITCs would be foregone, effectively increasing the taxpayer’s borrowing cost by 15%.