In an increasingly competitive technological environment, companies are constantly pushing the boundaries of innovation. To achieve ever more ambitious goals, it is common to see organizations partnering to pool their expertise and resources. These partnerships play a key role in accelerating the development of new products, processes, or services. In SR&ED contracts, how these collaborations are structured determines who can claim the tax credits.
The Scientific Research and Experimental Development (SR&ED) tax credit is a major strategic tool. This government program encourages investment in research and development and significantly reduces the costs associated with innovation. When a project is carried out collaboratively between two companies, it also offers the possibility to valorize the joint work.
However, a recurring question arises in this type of partnership: who can claim the SR&ED tax credits when a contractual payment is involved? The payer, who funds the work, or the contractor, who executes it?
Contractual Payment and SR&ED: A Frequent Issue
When a collaboration is based on a contractual payment, the lines between the roles of the parties can become blurred. If a company pays a service provider to perform certain activities, who is entitled to claim the investment tax credit (ITC)?
The basic rule is simple: the same expenditures cannot be claimed twice. In other words, either the payer or the executor can be eligible, but not both.
The difficulty arises when the contract does not clearly specify whether:
- The contractor is performing SR&ED on their own account,
- Or if they are acting on behalf of the payer, under a mandate.
This ambiguity opens the door to divergent interpretations and, in some cases, disputes during tax audits.
SR&ED Contract Analysis Criteria
To clarify the situation, it is essential to carefully examine the terms of the contract. Neither jurisprudence nor tax texts provide a single definitive criterion. However, government authorities consider a set of elements that, combined, determine which party is truly entitled to claim the SR&ED credits. Here are the main criteria to consider:
What work is covered by the contract?
The first question to ask is: does the contract stipulate that the contractor must carry out SR&ED activities?
If the contract explicitly provides for the performance of specific scientific or technological activities, then it is likely that this work will be considered as performed on behalf of the payer.
On the other hand, if the contract only describes an expected result, without specifying the methodology or the R&D activities to be undertaken, this may indicate that the contractor is acting on their own behalf, using their own methods to achieve the objective.
Example:
- A company commissions a subcontractor to develop a specific encryption algorithm: the SR&ED is performed on behalf of the payer.
- A company entrusts the optimization of its database, only setting performance goals without imposing a method: the subcontractor conducts the SR&ED on their own account.
Who assumes the financial risk?
The sharing of risks is a determining criterion. If the contract provides for a ceiling price, beyond which the contractor must absorb the overruns, this demonstrates that the contractor assumes a significant part of the risk. In this case, the expenses related to the work could be considered as incurred on their own account.
On the other hand, if the payer continues to remunerate the contractor even when the results do not meet expectations, it means that the risk rests primarily with the payer. The SR&ED is probably conducted on their behalf.
Example:
- If the contract stipulates that the contractor will not be paid in case of failure, they assume the risk: the SR&ED belongs to them.
- If the service provider is paid regardless, even if the prototype fails, then it is the payer who bears the risk and can claim the credit.
Who holds the intellectual property?
The intellectual property (IP) resulting from the work is an important indicator. If the contractor retains the IP, it is likely that they carried out the SR&ED on their own behalf. If the IP is transferred to the payer or if they obtain an exclusive right of exploitation, this supports the idea that the work was carried out on their behalf.
Nature of the contract: service or sale of goods?
When the previous criteria do not suffice to decide, it is useful to examine the substance of the contract: A service contract may indicate that the work was done on behalf of the payer. A contract for the sale of goods, on the other hand, is not necessarily proof that the SR&ED was done on behalf of the contractor: it still depends on the contractual obligations.
Example:
- If an AI firm develops a customized predictive model for a client, it is a service contract: the SR&ED is done on behalf of the payer.
- If it simply sells a license for an existing model, it is a contract for the sale of goods, without SR&ED on behalf of the payer.
Our Recommendation: Anticipate During Contract Drafting
The question of who can claim SR&ED credits in a partnership does not have a unique answer. It all depends on the terms of the contract, the sharing of risks, the intellectual property, and the nature of the work performed.
The best strategy is to anticipate these issues during the contract drafting. A clear, precise contract, compliant with the criteria recognized by the tax authorities, avoids ambiguities and secures the tax benefits.
