SR&ED Contract Payments: What You Need to Know
The Scientific Research and Experimental Development (SR&ED) program is a tax incentive program administered by the Canada Revenue Agency (CRA). It encourages Canadian businesses to conduct research and development (R&D) activities by providing tax credits and deductions for expenditures related to eligible SR&ED work.
One way businesses can conduct SR&ED work is by hiring contractors to perform R&D activities on their behalf. These contractors may include individuals, sole proprietors, partnerships, corporations, or even foreign entities.
If you are a business owner who hires contractors to perform SR&ED work, it`s important to understand the rules and requirements regarding contract payments. Here are a few key things you should know:
1. Eligibility of Contract Payments
Contract payments for SR&ED work are eligible for tax credits and deductions, but only if they meet certain criteria. The CRA requires that the work performed by the contractor must meet the definition of SR&ED, and the contractor must not be an “associated corporation” of the business.
Additionally, the contract must be in writing and provide a detailed description of the work to be performed, the total amount to be paid, and the payment schedule. The contract must also be signed by both parties before the work begins.
2. Reporting Contract Payments
When a business pays a contractor for SR&ED work, they must report the payment on their income tax return. The amount paid is entered on line 240 in the “Calculation of SR&ED Expenditures” section of the T661 form.
It`s important to note that the payment amount must be consistent with the amount specified in the contract. Any overpayments or underpayments could result in a reduction or disallowance of the SR&ED tax credit or deduction.
3. Record-Keeping Requirements
Businesses must keep detailed records of all contract payments related to SR&ED work, including invoices, receipts, and contracts. These records must be kept for six years from the end of the tax year to which they relate.
It`s also important to keep track of the contractor`s name, address, and business number, as well as the number of hours spent on SR&ED work and the nature of the work performed.
4. Withholding Taxes
Businesses are not required to withhold income tax or Canada Pension Plan (CPP) contributions on contract payments for SR&ED work, but they are required to withhold and remit 15% withholding tax on payments made to non-resident contractors who perform SR&ED work in Canada.
This withholding tax can be reduced or eliminated if the contractor is eligible for a tax treaty exemption or if they obtain a waiver from the CRA.
In conclusion, SR&ED contract payments can be a valuable tool for businesses looking to conduct R&D activities. By understanding the eligibility requirements, reporting rules, record-keeping requirements, and withholding tax rules, businesses can ensure that they are fully compliant with the SR&ED program and able to take advantage of the tax incentives it provides.