Revenue Canada Policy on Linked Activities
The Regulation that defines SR&ED allows that SR&ED encompasses basic research, applied research, and experimental development. It also includes in the definition of SR&ED support or linked work with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research where the work is commensurate with the needs and directly in support of basic and applied research and experimental development.
Some taxpayers only undertake the support activities involved in an SR&ED project. Except for special rules designed to cover situations where the support activities are performed for a non-arms length party, a taxpayer who only undertakes support activities will not be considered to be doing SR&ED.
This analysis becomes more complicated when only a part of a project is being undertaken inside Canada. Revenue Canada’s position is that a company must be undertaking either basic or applied research or experimental development in Canada before any support or linked activities will be eligible for SR&ED tax credits. Further it is their policy that only those linked activities performed in Canada will be eligible for the tax credits. This policy is based on the wording of Regulation 2900, the definition of SR&ED, as it applies to taxation years ending after December 2, 1992.
On a careful reading of Regulation 2900 as it read prior to the most recent amendments that are applicable to taxation years ending after December 2, 1992 there appears to be some room for interpreting that a taxpayer who performs only support activities may still be able to claim SR&ED incentives. We have been advised informally that Revenue Canada does not agree with our interpretation. Where amounts are significant, a court challenge might provide an interesting result.
The Strategy
Where R&D project tasks are divided up between separate companies, make sure that your company performs more than just linked activities.
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