In a previous article, I explained to what extent the rules related to the attribution of SR&ED expenditures can be complex. I emphasized above all the importance to ensure that the contracts defining these aids indicated clearly to what purpose were used each fund received in order to avoid all ambiguity that could lead to the reduction of your tax credit. Today, I would like to examine closely the types of help and treat conditionally repayable loans.

Conditionally repayable loans can be defined in many ways because they are halfway between a loan and a contribution. Therefore, it is difficult to identify those types of help when comes the time to apply for a tax credit. Even more, neither the ITA (Income Tax Act) nor the Canadian Revenue Agency (CRA) guide and application policy on the SR&ED have clear definitions. However, they supply factors to be considered during your contracts analysis:

• The agreement refers to a contribution rather than a loan and does not have firm refunding modalities;
• Refunding of the loan is not defined clearly in reality;
• The absence of commercial motivation from the contributor can indicate that the applicant receives assistance;
• A government who did not carry out a normal commercial investment.

The CRA’s position for this type of loans is clear. The agency considers them as a form of government assistance. Therefore, you have to reduce your SR&ED deduction (both federal and provincial) and your investment tax credit (ITC) claim by this assistance in the year it is received or entitled to be received. Fortunately, those losses can be partially reclaimed when the loan is repaid. I say “partially” because the corporation having repaid the conditional loans will receive for it a non-refundable tax credit, which could be applied during the subsequent years. However, if the tax rate is inferior during the years when the help is repaid, the tax saving will be lower than if the SR&ED deduction could have been claimed for the year the help was received.

In short, considering the after-tax cost, the conditionally repayable loans do not constitute the more profitable method to finance your SR&ED work.