Payments to Non-Residents for SR&ED
In the past, Canadian companies making payments for SR&ED to foreign consultants, who came to Canada to perform their work, could claim SR&ED tax credits in respect of that work. Now, unless the foreign company is required to pay tax in Canada on that payment, by virtue of having a permanent establishment in Canada, the payment is no longer eligible for tax credits.
Payments to Non-Residents for SR&ED
by Bruce Braithwaite
In the past, Canadian companies making payments for SR&ED to foreign consultants, who came to Canada to perform their work, could claim SR&ED tax credits in respect of that work. Now, unless the foreign company is required to pay tax in Canada on that payment, by virtue of having a permanent establishment in Canada, the payment is no longer eligible for tax credits.
In order for a payment to a person or partnership to qualify for SR&ED tax credits, that person or partnership must be a taxable supplier in respect of that payment. Non-residents that do not carry on business in Canada through a permanent establishment are not considered taxable suppliers.
One example of a company that might be caught by these new rules, is a Canadian company that hires foreign-based contract programmers who come to Canada for a short period of time to work on a project. Another example is where a Canadian subsidiary of a US company brings US employees to Canada to work on an SR&ED project, and the US company charges their salaries back to the Canadian company. In both of these examples, these expenditures will not qualify for SR&ED tax credits.
The Strategy
When dealing with non-resident sub-contractors it is important to know their tax status in Canada. To establish SR&ED eligibility, consider putting non-resident contractors on your payroll to avoid the application of these rules.
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