Third party payments are disbursements made to third parties, where the funds are to be used for financing SR&ED activities, where the recipient defines the work performed, and retains ownership to the technology developed. When a taxpayer makes a payment to a third party for SR&ED the amount of that payment is generally eligible for SR&ED tax credits if:

• It is to be used for SR&ED carried on in Canada
• It is related to the business of the payer
• the payer is entitled to exploit the results of the SR&ED
  the payment is to one of the listed third parties such as an approved association, university or college, research institute, not-for-profit R&D corporation, or organization that makes a payment to one of the aforementioned approved organizations
• These payments are different from those under which the payer defines the work to be performed, and where the payer retains sole right to the technology. Examples of third party payments are payments by pharmaceutical companies to fund University research where the research is of interest to the payer. A third party payment would not include a donation to a University to do with it what they please, and would not include a payment to a University under a contract where the statement of work was clearly defined by the payer. Revenue Canada has provided its interpretation of the related to the business test in an Application Policy paper. In that paper it indicates that the work must have some interconnection or link between the SR&ED and the general area of a taxpayer’s business. It also confirms that the work also qualifies if the research results may lead to, or facilitate, and extension to, a business. Revenue Canada’s policy as presented in that paper takes a fairly broad interpretation as to when a taxpayer is entitled to exploit the results of the SR&ED. Examples of where a taxpayer is considered to be entitled to exploit the results are as follows:
• The taxpayer has the right to use a resulting patent, even where they have to pay a royalty to do so
• The taxpayer has access to unpublished results, or early results

Where a taxpayer has to buy the resulting product to use it, or where others have access to unpublished or early results, the taxpayer would not be considered to be entitled to exploit the results for the purpose of this definition.

It also suggests in that paper that a taxpayer must be capable of backing up their claim with documentation.

There is some misconception as to the type of activities to which the “entitled to exploit the results test” is applied to. It should be noted that the test does not apply to SR&ED work undertaken by or on behalf of the taxpayer.

The Strategy
Companies who make these third party payments should insure that the contractual arrangement is such that they are entitled to exploit the results. In the event of audit a taxpayer should be ready to support this position to Revenue Canada. Proof of early access to results or actual use of results can aid in supporting entitlement.

Links

• CRA Application Policy - Payments to third parties for SR&ED
• CRA Third Party Payment Approval Process

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