When an agreement is concluded between a company and a subcontractor to carry out Scientific Research and Experimental Development (SR&ED) work, the total amounts payable in accordance with the contract can be expenses eligible for the SR&ED tax credit. The CRA did not establish a unique criterion that permits the systematic identification of a contractual payment eligible for the SR&ED tax credit. In certain cases, it can be difficult to determine which of the two (client or executant) can ask for the SR&ED tax credit. A close analysis of the contract clauses will be necessary (if such a contract exists…). The elements below (coming from the CRA) should be established in an agreement between the two parties before the beginning of the work.

1. Intellectual Property (IP): If the client keeps the IP relative to the SR&ED work, carried out by the contractor, it shows that the work was done performed the client. However, in case the client only has a conditional right to use the IP, the CRA considers it as a clue that the work was not performed by the client.

2.  Pricing vs. risks assumed: The notion of risk is very important. A maximum price clause can render the use of a performer to carry out the SR&ED for the client arguable. This clause, and the one on payments at precise stages, or centered on results, indicates that the performer delivers a product (not SR&ED services), while a cost plus contract normally implies that the SR&ED work is carried out for the client.

3.  The contract for services vs. contract for the sale of goods: A contract for services generally implies that the SR&ED work was made for the client. However, as it was mentioned previously, a fixed price contract generally consists of the making and the delivery of goods (and not of an SR&ED service).

4. Work supervision: A client representative should supervise and approve the work in order to demonstrate a close interaction between both companies. If no supervision is planned, we can wonder about the client’s ability to carry out an activity eligible for the SR&ED tax credit.

As in any business situation, it is preferable to have an agreement before the start of the work. Establish clear expectations and all will go well.