Who Owns the SR&ED? Navigating Claim Rights in Complex Business Relationships

When multiple Canadian companies collaborate on innovative work, determining who has the right to claim SR&ED tax credits can become complicated. The CRA wants to avoid double-dipping; if a contractor's work is being claimed by a company, the contractor shouldn't be claiming SR&ED for the same work. Ideally, this is clearly defined in the contract. But where tWho Owns the SR&ED? Navigating Claim Rights in Complex Business Relationshipshe contract lacks terms, who has the rights to the SR&ED? The answer isn't always clear. The CRA looks at tWho Owns the SR&ED? Navigating Claim Rights in Complex Business Relationshipshe context of the work. Understanding the CRA's position and incorporating clear terms in your contracts can prevent disputes and maximize benefits.

Contractual Protections: Making SR&ED Rights Clear

To avoid disputes, address SR&ED rights explicitly in your contracts. This can designate one party or establish a shared approach. You can go further by outlining responsibilities for maintaining SR&ED documentation and tracking costs. Providing detail on what costs and activities make up invoices helps determine which portions are eligible. Outside of explicit clauses, the contract may contain clues as to who has entitlement to the SR&ED.

CRA Policy: Risk and Other Factors

As assessment of the full circumstances is required when there is no SR&ED contract clause. Financial risk is the primary consideration (CRA Policy). The entity that bears the financial risk of the project's failure is typically the one entitled to claim the SR&ED tax credits.

Financial risk indicators include:

• Who funds the project

• Who bears cost overruns

• Who maintains control over project direction

  
  

Intellectual property is another criterion. Whoever retains the advancement as a result of the SR&ED work is likely the one who can claim the ITCs.

Finally, the type of work in the contract can provide some indication. If the contractor is specified to do experimentation, they are likely supporting someone else's project. However, if the work seeks only a certain output, the SR&ED may be in developing that result.

Common Scenarios and Who Can Claim

Scenario 1: Engineering

Example: Company A hires Engineering Firm B to develop a custom manufacturing process.

• Fixed-price contract: If Engineering Firm B bears the risk of cost overruns due to technical challenges, they likely have claim rights.

• Time and materials contract: If Company A pays for all work regardless of success, Company A likely has claim rights.

  
  

Scenario 2: Specialized Equipment Development

Example: Manufacturer C contracts Designer D to create specialized production equipment.

• If Designer D retains the right to sell similar equipment to others, they likely bear the risk and have claim rights.

• If Manufacturer C has exclusive rights to the resulting technology and pays regardless of success, they likely have claim rights.

  
  

Scenario 3: Software Development

Example: Startup E hires Software Company F to develop innovative algorithms.

• If Software Company F is exploring unproven techniques on a fixed bid, they likely bear the technological risk and have claim rights.

• If Startup E is directing the experimental approach and paying for all iterations, they likely have claim rights.

  
  

Collaboration Projects: Sharing the Credit

In true collaborative projects, multiple parties may have legitimate SR&ED claims for their respective contributions. The CRA allows for such arrangements when:

• Each party performs eligible SR&ED activities

• Each party bears financial risk for their portion

• The claims don't double-count the same expenses

• The collaboration is properly documented

Documentation tips for collaborative claims:

• Clearly define each party's scope of work and associated risks

• Document the specific technological uncertainties each party addresses

• Maintain separate records of experimental activities and resources

• Establish protocols for sharing research findings

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The Bottom Line

When multiple parties are involved in innovative work, understanding SR&ED claim rights is crucial for maximizing tax benefits. By focusing on who bears the financial risk of technological uncertainty—not just who owns the IP—and incorporating clear language in your contracts, you can avoid disputes and ensure your innovation activities receive the tax recognition they deserve.

Remember that the CRA evaluates each case on its specific circumstances. When in doubt, consider engaging an SR&ED specialist to review your contractual arrangements before finalizing agreements with partners or clients.

Get Started: Not sure who should claim the SR&ED in your collaborative project? Contact us for a free assessment of your specific situation.