SR&ED Claims for Partnerships Policy

Date: December 18, 2014

Changes to the SR&ED Claims for Partnerships Policy

Revision reasons

This revision accommodates the legislative changes that have been announced.

This update also provides explanations that are consistent with the 2013 version of the T4068, Guide for the Partnership Information Return (T5013 Forms), when the partnership is filing Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

Revision overview

The 2013 version of the T4068, Guide for the Partnership Information Return (T5013 Forms), indicates that the partnership should file the Form T661 with the Partnership Information Return (T5013 Forms) no later than 12 months after the earliest of all filing-due dates for the return of income of the members (each member’s income tax return) for the tax year in which the partnership’s fiscal period ends.

A member (partner) can file the Form T661 on behalf of the partnership but the SR&ED claim will not be processed unless a partnership information return, which agrees with the Form T661, has been filed.

Legislative changes resulting from the 2012 federal budget provide that starting in 2014, capital expenditures no longer qualify for SR&ED tax incentives and the basic investment tax credit (ITC) rate is reduced to 15%.

The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.

Table of contents


1.0 Purpose

The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding partnerships when administering the scientific research and experimental development (SR&ED) legislation under the federal Income Tax Act and the Income Tax Regulations.

2.0 Overview

This document specifically deals with  SR&ED  expenditures incurred by a partnership and the allocation of SR&ED investment tax credits (ITCs) to members of a partnership. This document does not deal with ITCs earned on qualified property, apprenticeship expenditures, or child care expenditures. Furthermore, the determination of an interest in a partnership, the calculation of the adjusted cost base of an interest in a partnership, and the calculation of the net income of a partnership are beyond the scope of this document. For a comprehensive guide on partnerships for income tax purposes, please refer to T4068, Guide for Partnership Information Return (T5013 Forms).

3.0 Partnerships

In this document the terms, "members," "members of a partnership," and "partners" are used interchangeably and have the same meaning. The Income Tax Act does not define a partnership, but it outlines the tax consequences if a partnership exists.

A taxpayer is considered to be a person, which can be an individual, a corporation, or a trust. A partnership is not a person for tax purposes, but the income for tax purposes is computed as if the partnership were a separate person, and therefore a taxpayer. For more information, please refer to T4068, Guide for Partnership Information Return (T5013 Forms).

Legislative References Income Tax Act
Paragraph 96(1)(a) Partnerships – general rules – if partnership were a separate person
Subsection 248(1) Definition of "person"
Subsection 248(1) Definition of "taxpayer"

3.1 What is a partnership?

A partnership is the relationship that exists between two or more persons who join to carry on a trade or business in common with a view to making a profit. If there is no business in common, there is likely no partnership. For instance, co-ownership of a rental property as an investment does not in itself constitute a partnership. In a partnership, each person contributes money, property, labour, or skill, and each person expects to share in the profits (or the losses) of the business enterprise. It is possible to have a valid partnership without a formal written partnership agreement, but it is preferable that such an agreement exists. A partnership can be formed between individuals, corporations, trusts, or other partnerships, in any combination. To determine whether a particular arrangement at a particular time constitutes a partnership, refer to the relevant provincial law on the subject. For more information, please also refer to T4068, Guide for Partnership Information Return (T5013 Forms), and Income Tax Folio S4-F16-C1: What is a Partnership?

The type and extent of a person's involvement in the business is important in determining whether the person is a partner. In general, every partner is entitled and bound to take part in the conduct of the business, unless it is otherwise agreed upon. Every partner is liable for the debts of the partnership unless such liability is limited by an agreement. Regarding third parties, the act of every partner, within the ordinary scope of the business, binds the other partners, whether they have sanctioned the act or not. The production of a partnership is generally owned by the partnership, not the partners, until the profits are allocated to the partners or the partnership is dissolved. Partners are general agents of the other partners and are generally jointly and severally liable for the expenses of the partnership, although, in the case of a limited partnership (see section 3.3.2), limited partners (see section 3.2.2) are only liable to a certain extent.

For tax purposes a partnership does not have a separate existence from its partners. As a result, a partnership does not file an income tax return, and the income is not taxed at the partnership level. All income and losses flow out to the partners, who report their share of the partnership income on their income tax return (whether it is a T1, General Income Tax and Benefit Return; a T2, Corporation Income Tax Return; or a T3, Trust Income Tax and Information Return). The amount of net income or loss, after deducting the pool of deductible SR&ED expenditures, and the SR&ED investment tax credits (ITCs) that can be allocated will depend on whether the partner is a general partner (see section 3.2.1), limited partner (see section 3.2.2), or specified member (see section 3.2.3).

A joint venture is not a partnership. A joint venture is usually defined by an agreement. Distinguishing between a joint venture and a partnership can be difficult. The existence of a partnership or a joint venture is a legal issue to be decided on the merits of each case. Generally, a joint venture is a relationship that exists between two or more persons pursuing a single endeavour or finite project while a partnership is the relationship that exists between two or more persons carrying on a business in common with a view to making a profit.

In a joint venture, the essential strategic and functional decisions (for example, acquiring new capital property or making large expenditures) normally require the consent of all the joint venture participants, and they usually cannot be made by one participant acting as an agent for another (unless there is a separate agency agreement). A joint venture participant usually cannot enter into contracts that bind the other participants without first obtaining their consent. A joint venture is not required to carry on a business. For tax purposes there is no net income of the joint venture. Any revenue, expenses, capital receipts, and outlays of a joint venture are allocated to the participants of the joint venture, who then compute their net income. Each joint venture participant should file an SR&ED claim for the SR&ED work they have performed, for the SR&ED they have paid to have performed on their behalf, or if they made a third-party payment for SR&ED.

3.2 Types of partners

3.2.1 General partner

A general partner is a partner whose personal liability for the debts and obligations of the partnership is not limited.

3.2.2 Limited partner

A limited partner is generally a partner whose liability as a partner is limited at any time during the fiscal period, under partnership law or a partnership agreement.

For the purposes of the Act, a certain partner will also be considered to be a limited partner in other situations. For more information, please refer to T4068, Guide for Partnership Information Return (T5013 Forms).

Legislative Reference Income Tax Act
Subsection 96(2.4) Limited partner

3.2.3 Specified member

The term "specified member" is defined in the Act. The status as a specified member of a partnership is determined for each partner for a particular fiscal period or tax year of the partnership. Generally, a specified member includes the following:

  • any partner who is a limited partner (see section 3.2.2) at any time during the partnership's fiscal period or tax year; and
  • any partner (including a general partner, see section 3.2.1) who, while a partner, was not regularly, continuously, and substantially, during the partnership's fiscal period or tax year:
    • actively engaged in the activities of the partnership's business, except for the financing of the partnership; or
    • carrying on a business similar to that of the partnership in its tax year.

To be considered actively engaged in the activities of a partnership, a partner would normally be expected to contribute time, labour and attention to the business of the partnership to a sufficient extent that such contributions would be a determinant in the successful operation of the business. To determine whether the activities of members are sufficient, the particular facts of a situation must be reviewed as a whole. A partner who has invested or contributed assets to the partnership but does not participate at all in the management of the business would not be considered to be actively engaged. Moreover, the participation of the member must be regular, continuous, and substantial. These criteria would not be met, for example, if the member's activities and efforts were infrequent, were only for financing the partnership business, or were provided at irregular intervals.

Legislative Reference Income Tax Act
Subsection 248(1) Definition of "specified member"

3.3 Common types of partnerships

3.3.1 General partnership

A partnership composed of two or more general partners (see section 3.2.1) may be referred as a general partnership, but it is often simply known as a partnership.

3.3.2 Limited partnership

A limited partnership has at least one general partner (see section 3.2.1) and one or more limited partners (see section 3.2.2). Usually limited partners invest or contribute assets to the partnership but do not participate in the management of the partnership business, which is managed by the general partner. A limited partnership must be registered under the appropriate provincial or territorial registry system.

3.3.3 Tiered partnership

A tiered partnership has one or more partners that are partnerships. When a partnership is a member of a particular partnership that is a member of another partnership, those partnerships are tiered partnerships. In common language, the first partnership is referred to as a top-tier partnership, the second one as a second-tier partnership, and the last one as a third-tier partnership. Where there are many affiliated partnerships, the expression “multi-tiered partnerships” is sometimes used.

4.0 Legislation concerning partnerships and SR&ED claims

The following sections describe what is different for partnerships from other SR&ED claimants.

4.1 Partnership's deemed tax year

A partnership's fiscal period is considered to be its tax year as if it were a person.

Generally, a partnership must use the calendar year (December 31) as its fiscal period and as its tax year-end when:

  • at least one member of the partnership is an individual;
  • at least one member of the partnership is a professional corporation; or
  • the partnership is a member of another partnership.

In the case where the members of the partnership are all corporations, the partnership's fiscal period is determined by them.

Legislative References Income Tax Act
Paragraph 96(1)(b) Partnerships – general rules – if tax year of partnership were its fiscal period
Subsection 248(1) Definition of "person"
Subsection 248(1) Definition of "professional corporation"
Subparagraph 249.1(1)(b)(ii) Definition of "fiscal period" – partnership

4.2 Determination of the net income of the partnership

Generally, a partnership's net income or loss, adjusted for income tax purposes, flows through to the partners. For income tax purposes, the income of a partnership is calculated as if the partnership were a distinct entity (person), even though the income is taxed in the hands of the partners after it is allocated to them. The partnership deducts, in computing the income from the business for the year, such amounts in respect of SR&ED directly undertaken by the partnership or on its behalf. A partnership deducts various amounts such as expenses, capital cost allowance, and the pool of deductible SR&ED expenditures from its income before the respective share of the net income or loss is flowed through to each partner. The partnership usually allocates income, gains, losses, deductions, credits, and other amounts among the partners according to the terms of the formal partnership agreement. If there is no written agreement for this allocation, under provincial or territorial laws partners may be entitled to share equally in the capital and profits of the business. However, various provisions of the Income Tax Act can affect the amounts allocated to partners, depending on whether the partner is a general partner (see section 3.2.1), a limited partner (see section 3.2.2), or a specified member (see section 3.2.3). For example, a limited partner is not entitled to deduct the partnership loss allocated to them if the partnership pool of deductible SR&ED expenditures claimed created a partnership loss (see section 4.6.1 ). A specified member is precluded from receiving any of the partnership SR&ED investment tax credit (ITC) (see section 4.8.2).

Legislative References Income Tax Act
Subsection 9(1) Income from a business or property
Subsection 37(1) Pool of deductible SR&ED expenditures
Subsection 96(1) Partnerships – general rules
Paragraph 96(1)(a) Partnerships – general rules – if partnership were a separate person
Paragraph 96(1)(e.1) Partnership and the pool of deductible SR&ED expenditures
Subsection 96(2.4) Limited partner
Subsection 127(8) Investment tax credit of partnership
Subsection 248(1) Definition of "person"
Subsection 248(1) Definition of "specified member"
Subsection 248(1) Definition of "taxpayer"

4.3 SR&ED filing requirements

Since the net income must be calculated at the partnership level, the SR&ED expenditures should be identified with the prescribed information in respect of the expenditures on the partnership's Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

There is only one Form T661 for the partnership and not a separate Form T661 for each partner. Partners do not include any of the partnership's SR&ED expenditures on their Form T661 if they are filing an SR&ED claim for SR&ED expenditures incurred in a separate business that is not part of the partnership.

Generally, partnerships composed solely of members who are individuals (other than trusts), and have an absolute value of revenues plus an absolute value of expenses of less than or equal to $2 million, or have less than or equal to $5 million in assets would be exempted from filing a Partnership Information Return (T5013 Forms). For more information on which partnership must file the T5013 forms, please refer to the T4068, Guide for the Partnership Information Return (T5013 Forms).

Partnership required to file T5013 forms

A partnership, unless otherwise exempted, that carries on a business in Canada, or that is a Canadian partnership (or a specified investment flow-through partnership), at any time in a fiscal period of the partnership, must file an information return for that period in the prescribed form (T5013 Forms), including the following information:

  • the income or loss of the partnership for the fiscal period;
  • the name, address, social insurance or business number of each member of the partnership;
  • each member’s share of the income or loss of the partnership for the fiscal period;
  • each member’s share for the fiscal period of the deduction, credit or other amount in respect of the partnership that is relevant in determining the member's income, taxable income, tax payable or other amount under the Act; and
  • the prescribed information contained in the prescribed Form T661, where the partnership has made an expenditure in respect of SR&ED in the fiscal period.

For the purposes of filing the T5013 forms, an information return filed by any member of a partnership shall be deemed to have been filed by each member of the partnership.

The T5013 forms must be filed with CRA by the following date:

  • in the case where all the members of the partnership are corporations throughout the fiscal period of the partnership, no later than five months after the end of the partnership’s fiscal period;
  • in the case where all the members are individuals throughout the fiscal period of the partnership, no later than March 31 after the calendar year in which the fiscal period of the partnership ended. Note, generally the partnership must use the calendar year as its fiscal period when at least one of the members of the partnership is an individual; or
  • in the case where the members of the partnership are a combination of individuals (including trusts) and corporations, no later than the earlier of:
    • March 31 after the calendar year in which the fiscal period of the partnership ended; or
    • the day that is five months after the end of the partnership’s fiscal period.

When a Partnership Information Return (T5013 Forms) is required to be filed, the partnership Form T661 should be filed with this return. To facilitate processing, Form T661 should be filed with the Partnership Information Return (T5013 Forms) no later than 12 months after the earliest of all filing-due dates for the return of income of the members (each member’s income tax return) for the tax year in which the partnership’s fiscal period ends. Each member would then be able to meet the deadline to claim the SR&ED investment tax credit allocated to them. A member can file the Form T661 on behalf of the partnership but the SR&ED claim will not be processed unless a partnership information return, which agrees with the Form T661, has been filed.

A partner must file their Schedule T2SCH31, Investment Tax Credit – Corporations, or Form T2038(IND) Investment Tax Credit (Individuals) by their reporting deadline to earn any ITC allocated (see section 4.8.2) to them by the partnership. The partner should also include the slip, T5013 Statement of Partnership Income, to support the ITC allocated. For more information on how to determine the SR&ED ITC reporting deadline, please refer to section 6.0 of the SR&ED Filing Requirements Policy.

Partnership not required to file T5013 forms

If the partnership is exempt from filing a Partnership Information Return (T5013 Forms) and chooses not to file one, then each partner must file a copy of the partnership’s Form T661 with their Form T2038(IND) to claim the ITC allocated to them.

A partnership composed solely of members who are individuals (other than trusts) would be exempt from filing a Partnership Information Return. A partnership with a member who is an individual must have a year-end that corresponds to the calendar year. The filing due date of the T1, General Income Tax and Benefit Return, for an individual operating a business is June 15 of the following year. In this situation, the deadline to file Form T2038 is 12-months after the filing due date of the T1 return. For more information on how to determine the SR&ED ITC reporting deadline, please refer to section 6.0 of the SR&ED Filing Requirements Policy.

Example

Two individuals, Mr. A and Mrs. B, are the only members of a partnership. The partnership's fiscal year-end was December 31, 2012. The amount of revenues, expenses, and assets are such that the partnership was exempt from filing a Partnership Information Return (T5013 Forms) and chose not to file one.

Each individual's filing due date to submit a tax return would be June 15, 2013. The individuals would be required to file Form T2038(IND) with a copy of Form T661 for the partnership, financial statements for the partnership, and schedules showing the calculation and allocation of the ITC (see section 4.8.2) of the partnership on or before June 15, 2014.

Legislative References Income Tax Act
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 96(1) Partnerships – general rules
Paragraph 96(1)(e.1) Partnership and the pool of deductible SR&ED expenditures
Subsection 127(8) Investment tax credit of partnership

Legislative References Income Tax Regulations
Subsection 229(1) Partnership return
Subsection 229(2) Partnership return
Subsection 229(5) Partnership return

4.4 Partnerships and SR&ED work

As described in section 4.2, a partnership is not a person, but the net income for tax purposes, which would include a deduction for the pool of deductible SR&ED expenditures, is computed as if the partnership were a separate person. Therefore, the SR&ED work is considered to have been performed by the partnership and not by one of the members of the partnership.

The fact that a taxpayer is performing SR&ED work jointly or in collaboration with another taxpayer does not imply that a legal entity known as a partnership exists. The existence of a partnership would depend on the agreement.

When there is not a partnership arrangement, each taxpayer should file an SR&ED claim for the SR&ED they have performed, for the SR&ED they have paid to have performed on their behalf, or if they made a third-party payment for SR&ED. For more information on SR&ED performed on your behalf, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. For more information on third-party payments, please refer to the Third-Party Payments Policy.

4.5 Salary or wages

For income tax purposes, a member cannot be an employee of the partnership. Any salary or wages paid to a member is not a deduction for income tax purposes and therefore cannot be claimed as an SR&ED salary or wages expenditure. The CRA would consider such an amount to be a distribution of income to the partner.

4.6 Pool of deductible SR&ED expenditures

The entire amount in the partnership's pool of deductible SR&ED expenditures must be deducted in calculating the net income of the partnership in the year the expenditures are incurred. A partnership cannot have a pool of SR&ED expenditures to carry forward to future years. For information on what makes up this pool, please refer to the Pool of Deductible SR&ED Expenditures Policy.

Legislative Reference Income Tax Act
Subsection 37(1) Pool of deductible SR&ED expenditures

4.6.1 Partnership loss restrictions for limited partners

A partnership loss in the year, that has been created or increased by claiming the pool of deductible SR&ED expenditures, is not allowed to a limited partner (see section 3.2.2). In calculating the share of a partnership loss that is deductible by a limited partner, the partnership loss must be reduced by the lesser of the amount of SR&ED expenditure pool deducted by the partnership or the amount of the partnership loss. This applies to SR&ED expenditures incurred for SR&ED performed inside or outside Canada. For more information please refer to the section titled, "Allocating the income or loss to partners" in T4068, Guide for the Partnership Information Return (T5013 Forms) and the example below (see section 4.6.2).

The amount of a partnership loss that is not allowed to a limited partner (because it includes a deduction for SR&ED expenditures):

  • is not allowed to other partners;
  • does not become a limited partnership loss;
  • does not become a non-capital loss; and
  • does not affect the adjusted cost base of the limited partner's interest in the partnership.

Legislative References Income Tax Act
Paragraph 96(1)(e.1) Partnership and the pool of deductible SR&ED expenditures
Paragraph 96(1)(g) Restriction of partnership loss to limited partner due to SR&ED expenditure deduction
Subsection 96(2.4) Limited partner

4.6.2 Example – Partnership loss restrictions for limited partners

BIZ Partnership has one general partner and one limited partner. The partnership agreement states that each partner will receive an equal amount of the net income of the partnership. The partnership's net income for the fiscal period ending December 31, 2014 was $30,000 before deducting the amount of the SR&ED expenditure pool of $45,000. The calculations of the partnership's business loss (1) and the partnership business loss allowed to the limited partner (2) are as follows:

  1. The net partnership income before deducting SR&ED expenditure pool minus SR&ED expenditure pool deduction is negative $15,000 [$30,000 - $45,000 = -$15,000].
  2. The partnership net loss for the period (-$15,000) reduced by the lesser of the SR&ED expenditure pool deduction ($45,000) and the net loss (-$15,000). The partnership business loss allowed to the limited partner is $0 [$15,000 - $15,000 = $0].

The general partner would be allowed a partnership loss of $7,500 ($15,000 ÷ 2).

4.6.3 Effect of the allocated SR&ED investment tax credit on the pool of deductible SR&ED expenditures

When determining the partnership pool of deductible SR&ED expenditures for the year, the SR&ED ITC allocated to the partners (see section 4.8) in the year must reduce the pool in the same year. Furthermore, it does not matter if a partner has not claimed the SR&ED ITC against Part I tax or received a refund. This is different from other types of claimants where any SR&ED ITC applied against Part I tax or refunded in the year reduces the pool of deductible SR&ED expenditures in the subsequent year.

Legislative Reference Income Tax Act
Subsection 127(12.1) Allocation of ITC from a partnership reduces the pool of deductible SR&ED expenditures

4.6.4 Effect of the excess SR&ED investment tax credit recapture on the pool of deductible expenditures

Any amount added to the Part I tax payable of the partners because of an SR&ED ITC recapture excess will increase the amount of the partnership pool of deductible SR&ED expenditures in the subsequent year. For a discussion on what is an SR&ED ITC recapture excess, please refer to section 4.9.1.

Legislative Reference Income Tax Act
Paragraph 37(1)(c.3) Pool of deductible SR&ED expenditures – amounts added because of partnership ITC recapture excess amount

4.7 No non-arm's length transfer of SR&ED expenditures

Usually, when a party (the performer) performs SR&ED on behalf of a non-arm's length taxpayer who pays for the SR&ED (the payer), the parties can agree to have the qualified SR&ED expenditures of the performer transferred to the payer. For the purposes of the rules in respect of the transfer of qualified SR&ED expenditures, transfers can only be made between taxpayers. Since a partnership is not a taxpayer, a partnership cannot transfer to or receive from a non-arm's length taxpayer, qualified SR&ED expenditures.

Legislative Reference Income Tax Act
Subsection 127(13) Agreement to transfer qualified expenditures

4.8 Investment tax credit and partnerships

Since a partnership is not a taxpayer, it cannot earn ITC . In general, the ITC is calculated at the partnership level, then allocated to eligible partners (individuals, corporations, or trusts), but not necessarily to all partners.

Legislative References Income Tax Act
Subsection 127(8) Investment tax credit of partnership
Subsection 127(9) Definition of "investment tax credit", paragraph (b)

4.8.1 Determining the SR&ED investment tax credit

The following amounts are included in determining the partnership SR&ED ITC for the year:

less

  • any partnership SR&ED ITC recapture in the year (see section 4.9).

The SR&ED ITC allocated from a partnership can only be earned at the 15% rate even if the partner is a Canadian-controlled private corporation or a qualifying corporation.

Note
After 2013 the basic ITC rate is 15%; for tax years that end before 2014 the basic ITC rate is 20%. For tax years that include January 1, 2014, the reduction in the basic ITC rate is pro-rated based on the number of days in the tax year that are after 2013.

For more information on SR&ED ITC, please refer to the SR&ED Investment Tax Credit Policy.

Legislative References Income Tax Act
Subsection 127(8) Investment tax credit of partnership
Subsection 127(9) Definition of "investment tax credit", paragraph (b)
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(28) Recapture of investment tax credit of partnership

4.8.2 Allocation of SR&ED investment tax credit to a partner

The partner's reasonable share of the SR&ED ITC is added to the partner's ITC for the year. An SR&ED ITC amount is generally considered to be the partner's reasonable share if the amount is allocated to the partner in the same proportion as the partner's share of the partnership's income or loss, as agreed by the partners. But no SR&ED ITC can be allocated to a specified member (see section 3.2.3) of the partnership. The unallocated SR&ED ITC is allocated to the members of the partnership who are not specified members.

Essentially, the partnership SR&ED ITC that cannot be allocated to specified members is added to the ITC allocated to the members who were not specified members of the partnership at any time during the partnership's fiscal period. This additional allocation is based on what is reasonable in the circumstances, taking into consideration the investment in the partnership, including the debt obligations of the partnership, of each such member of the partnership. For an example of how the partnership SR&ED ITC is allocated, please refer to section 4.8.3.

Legislative References Income Tax Act
Subsection 127(8) Investment tax credit of partnership
Paragraph 127(8)(b) Investment tax credit of partnership – none for specified member
Subsection 127(8.1) Investment tax credit of limited partner
Subsection 127(8.3) Investment tax credit – allocation of unallocated partnership ITCs
Subsection 127(8.31) Amount of unallocated partnership ITC
Subsection 127(9) Definition of "investment tax credit", paragraph (b)

4.8.3 Example – Determination and allocation of the SR&ED investment tax credit

Facts:

  • A partnership consists of three partners who are individuals: an active general partner, a specified member who is not a limited partner (passive general partner), and a specified member who is a limited partner.
  • Each partner contributes $30,000 to the partnership, and the partnership borrows $20,000 from the bank. Thus, the partnership has $110,000 available to it.
  • The partnership agreement provides that the members share in the profits (losses) in proportion to their capital contributions (1/3 each).
  • The partnership pays $30,000 on qualified SR&ED expenditures. Therefore, the partnership determines that there is $4,500 ($30,000 x 15%) of SR&ED ITCs.

Note
After 2013 the basic ITC rate is 15%; for tax years that end before 2014 the basic ITC rate is 20%. For tax years that include January 1, 2014, the reduction in the basic ITC rate is pro-rated based on the number of days in the tax year that are after 2013.

Based on their respective contributions and the partnership agreement, each partner would be allocated 1/3 of the $4,500 of partnership SR&ED ITCs. However, the Act precludes the allocation of any portion of the $4,500 of SR&ED ITCs to a specified member (see section 3.2.3) of the partnership. In this example, there are two such members: the passive general partner (G) and the limited partner (LP).

The allocation of SR&ED ITCs would be $1,500 for the active general partner and $0 for each specified member (G) and (LP).

Consequently, there are $3,000 of SR&ED ITCs which are unallocated to partners. These unallocated SR&ED ITCs can be allocated to partners who are not specified members. The allocation is based on what is reasonable in the circumstances, taking into consideration each non-specified member's investment in the partnership, including debts of the partnership.

In this example, there is only one non-specified member of the partnership. Thus, the active general partner can be allocated 100% of the unallocated ITCs. The partnership can add SR&ED ITCs of $1,500 to the active general partner (non-specified member) plus the ITC of $3,000 allocated because of specified members for a total of $4,500 ($1,500 + $3,000).

4.8.4 Renunciation of the allocated investment tax credit

A partner who is not a specified member and who has been allocated SR&ED ITCs can renounce any part of the credits allocated to them from the unallocated ITC of a specified member (see section 4.8.2). The Act provides for an election. This can be made by using the prescribed Form T932, Election by a Member of a Partnership to Renounce Investment Tax Credits Pursuant to Subsection 127(8.4). When the ITC amount is renounced, the respective SR&ED ITC is extinguished, and there is no need to reduce the pool of deductible SR&ED expenditures by such an amount (see section 4.6.3). This renunciation of ITCs is only available for the ITCs that have been allocated because of a specified member. No ITCs can be renounced in the case of a partnership that has no specified members.

Legislative References Income Tax Act
Subsection 127(8.3) Investment tax credit – allocation of unallocated partnership ITCs
Subsection 127(8.4) Election to renounce allocated partnership ITC

4.9 Investment tax credit recapture

In general, the ITC recapture rules that apply to corporations and individuals also apply to partnerships. For a list of the four conditions that must be met for a recapture of ITC and the calculation of the ITC recaptured amount, please refer to the Recapture of SR&ED Investment Tax Credit Policy.

An ITC recapture calculation is required in the fiscal period of the partnership in which the property that previously resulted in an ITC to the partners was disposed of or converted to commercial use. Any recapture will be deducted from the ITC of the partnership available for allocation (see section 4.8.2). Members of the partnership will be allocated their share of the partnership ITC, reduced by the amount of the recapture.

Legislative References Income Tax Act
Subsection 127(8) Investment tax credit of partnership
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(30) Addition to tax – partnership
Subsection 127(35) Recapture of investment tax credit – non-arm’s length dispositions, partnerships

4.9.1 Excess of recaptured investment tax credit added to partner's tax payable

It is possible that, at the end of a tax year, a taxpayer is a member of a partnership that does not have a large enough calculated ITC for the year to offset an ITC recapture. This can occur when the total of all amounts that are added in calculating the partnership's ITC available for allocation to the partners for the year would be less than the total of all amounts that reduce the partnership ITC. The amount by which the reductions to the partnership ITC exceed the additions can be viewed as a negative partnership ITC amount or an excess ITC to be recaptured. The portion of the excess recaptured ITC that can reasonably be considered to be the taxpayer's share is added to the taxpayer's tax payable under Part I of the Act for the year. The amount added to the Part I tax of the members will increase the amount of the partnership's pool of deductible SR&ED expenditures in the following year (see section 4.6.4).

Legislative References Income Tax Act
Subsection 127(30) Addition to tax – partnership
Subsection 127(35) Recapture of investment tax credit – non-arm’s length dispositions, partnerships

4.9.2 Excess of recaptured investment tax credit and tiered partnerships

The Act provides a mechanism for the excess ITC recapture to flow through tiered partnerships (see section 3.3.3) until it reaches a member of a partnership who is a taxpayer. When a taxpayer is a member of a partnership that is a member of another partnership, the excess ITC recapture is allocated through the chain of tiered partnerships until the members are taxpayers and not partnerships.

Legislative Reference Income Tax Act
Subsection 127(31) Tiered partnership

4.9.3 The effect on the adjusted cost base of the member's partnership interest

An addition to the Part I tax for the year of a member of a partnership, because of an excess ITC recapture (see section 4.9.1), will increase the adjusted cost base (ACB) of the member's partnership interest. For more information on the ACB of the member's partnership interest, please refer to T4068, Guide for the Partnership Information Return (T5013 Forms).

Legislative References Income Tax Act
Paragraph 53(1)(e) Adjustments to cost base – interest in a partnership
Subsection 127(30) Addition to tax – partnership

4.9.4 Investment tax credit recapture on disposition to a non-arm's length partnership

The SR&ED ITC recapture rules will not apply to a taxpayer or a partnership who disposes of SR&ED property to a non-arm's length purchaser, if the non-arm’s length purchaser continues to use the property all or substantially all for SR&ED. Therefore the SR&ED ITC recapture rules do not apply to the disposal of SR&ED property between non-arm's length parties when a partnership is involved, provided the purchaser uses the property for SR&ED.

However, SR&ED ITC recapture will occur if the property that was purchased by the non-arm's length party is subsequently disposed of or converted to commercial use. The party that disposed of the property or converted it to commercial use will be subject to an ITC recapture even though another non-arm's length party originally received the ITC. When a partnership acquires a property from a non-arm's length party and then subsequently disposes of the property (or a portion thereof) or converts it (or a portion thereof) to commercial use, the ITC of the partnership must be reduced by the SR&ED ITC recapture amount before the SR&ED ITC is allocated to the partners.

For more information on how to determine the SR&ED ITC recaptured amount, please refer to section 10.0 of the Recapture of SR&ED Investment Tax Credit Policy.

Legislative References Income Tax Act
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(33) Certain non-arm's length transfers
Subsection 127(35) Recapture of investment tax credit – non-arm’s length dispositions, partnerships

4.10 Refundable SR&ED investment tax credit and partnerships

The definition of refundable ITC in the Act applies to qualifying corporations, individuals, and certain trusts, and it includes the ITC allocated from a partnership at the 15% rate (see note). However, only 40% of the partnership-allocated 15% ITC (see note) on current and capital qualified expenditures can be refunded in the year when the tax payable for the year is nil. SR&ED capital expenditures made after December 31, 2013, no longer qualify for SR&ED tax incentives.

When a member of a partnership is a corporation, other than a qualifying corporation, the 15% ITC (see note) allocated from the partnership cannot be refunded. This includes the situation where a Canadian-controlled private corporation (CCPC) that is not a qualifying corporation would otherwise be eligible for the enhanced 35% ITC rate. The ITC allocated from the partnership remains at 15% (see note), none of which is refundable to the CCPC.

Note
After 2013 the basic ITC rate is 15%; for tax years that end before 2014 the basic ITC rate is 20%. For tax years that include January 1, 2014, the reduction in the basic ITC rate is pro-rated based on the number of days in the tax year that are after 2013. For more information on ITCs and refundable ITCs, please refer to the SR&ED Investment Tax Credit Policy.

Legislative References Income Tax Act
Subsection 127(9) Definition of "investment tax credit"
Subsection 127(9) Definition of "investment tax credit", paragraph (b)
Subsection 127.1(2) Definition of "refundable investment tax credit"
Subsection 127.1(2.01) Additions to refundable investment tax credit

4.11 When partnerships are considered to be corporations

A partnership is not a person for tax purposes, but in the situations outlined below the Act deems a partnership to be a corporation.

4.11.1 Sharing the cap amount calculated on the year's maximum pensionable earnings

In certain situations, a partnership may be deemed to be a corporation and considered associated with a particular corporation. The Act contains rules for determining the allocation of the salary or wages of an individual who is a specified employee of two or more associated corporations. The allocation is limited to an amount based on the Year's Maximum Pensionable Earnings (YMPE). For more information on the YMPE allocation, please refer to section 6.1.1 of the SR&ED Salary or Wages Policy.

For the purposes of allocating the 5 x YMPE cap amount in determining the salary or wages expenditure for a specified employee, a partnership is deemed to be a corporation, associated with a particular corporation, when:

  • a partnership includes a majority interest partner who is:
    • an individual related to the particular corporation; or
    • a corporation associated with the particular corporation; or
  • a limited partnership includes a member whose liability is not limited (for example, a general partner) who is:
    • an individual related to the particular corporation; or
    • a corporation associated with the particular corporation.

For the purposes of allocating the 2.5 x YMPE cap amount for a specified employee in determining the salary base for calculating the prescribed proxy amount (PPA), a partnership, any member of which is an individual related to a particular corporation or a corporation associated with a particular corporation shall deem the partnership to be a corporation associated with the particular corporation.

Legislative Reference Income Tax Act
Subsection 37(9.5) Deemed corporation

Legislative Reference Income Tax Regulations
Subsection 2900(10) Deemed to be a corporation and associated

4.11.2 Filing-due date for the assistance and contract payment rules

For the purposes of applying the SR&ED government assistancenon-government assistance or contract payment rules, the tax year of a partnership is deemed to be its fiscal period. The partnership filing-due date is deemed to be the day that would be the filing-due date if it were a corporation, therefore six months after the partnership fiscal year-end. This is only for the purposes of determining if government assistance, non-government assistance, or contract payments that must be applied against allowable SR&ED expenditures and qualified SR&ED expenditures at the partnership level, should be applied in the year. For more information on assistance and contract payments, please refer to the Assistance and Contract Payments Policy.

Legislative Reference Income Tax Act
Subsection 127(23) Partnership taxation year

4.12 Additional situations where partnership is specifically referenced in the Income Tax Act

Even though a partnership is not recognized as a person by the Act and therefore is not a taxpayer, the Act ensures that certain legislative provisions also apply to partnerships by specifically including the word "partnership" in the provision. The following are some situations that apply to partnerships, which were not discussed in this document:

Subsection 37(13) of the Act, Non-arm's length contract – linked work. For more information, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

Subsection 127(9) of the Act, Definition of "contract payment." For more information, please refer to the Assistance and Contract Payments Policy.

Subsection 127(9) of the Act, Definition of "qualified expenditure," paragraph (f). For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Subsection 127(9) of the Act, Definition of "qualified expenditure," paragraph (g). For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Subsection 127(9) of the Act, Definition of "taxable supplier." For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Subsection 127(11.7) of the Act, Definition of "adjusted selling cost" and Definition of "adjusted service cost. " For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Subsection 127(18) of the Act, Reduction of qualified expenditures. For more information, please refer to the Assistance and Contract Payments Policy.

Subsection 127(19) of the Act, Reduction of qualified expenditures. For more information, please refer to the Assistance and Contract Payments Policy.

Subsection 127(20) of the Act, Agreement to allocate. For more information, please refer to the Assistance and Contract Payments Policy.

Subsection 127(24) of the Act, Exclusion from qualified expenditures. For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Subsection 127(25) of the Act, Deemed contract payment. For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Legislative References Income Tax Act
Subsection 37(13) Non-arm's length contract – linked work
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "qualified expenditure", paragraph (f)
Subsection 127(9) Definition of "qualified expenditure", paragraph (g)
Subsection 127(9) Definition of "taxable supplier"
Subsection 127(11.7) Definition of "adjusted selling cost"
Subsection 127(11.7) Definition of "adjusted service cost"
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate
Subsection 127(24) Exclusion from qualified expenditures
Subsection 127(25) Deemed contract payment

Appendix A – References

A.1 Legislative references

List of provisions
Income Tax Act Description
Subsection 9(1) Income from a business or property
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 37(1)(c.3) Pool of deductible SR&ED expenditures – amounts added because of partnership ITC recapture excess amount
Subsection 37(13) Non-arm's length contract – linked work
Subsection 37(9.5) Deemed corporation
Paragraph 53(1)(e) Adjustments to cost base – interest in a partnership
Subsection 96(1) Partnerships – general rules
Paragraph 96(1)(a) Partnerships – general rules – if partnership were a separate person
Paragraph 96(1)(b) Partnerships – general rules – if tax year of partnership were its fiscal period
Paragraph 96(1)(e.1) Partnership and the pool of deductible SR&ED expenditures
Paragraph 96(1)(g) Restriction of partnership loss to limited partner due to SR&ED expenditure deduction
Subsection 96(2.4) Limited partner
Subsection 127(8) Investment tax credit of partnership
Paragraph 127(8)(b) Investment tax credit of partnership – none for specified member
Subsection 127(8.1) Investment tax credit of limited partner
Subsection 127(8.3) Investment tax credit – allocation of unallocated partnership ITCs
Subsection 127(8.31) Amount of unallocated partnership ITC
Subsection 127(8.4) Election to renounce allocated partnership ITC
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "investment tax credit"
Subsection 127(9) Definition of "investment tax credit", paragraph (b)
Subsection 127(9) Definition of "qualified expenditure", paragraph (f)
Subsection 127(9) Definition of "qualified expenditure", paragraph (g)
Subsection 127(9) Definition of "taxable supplier"
Subsection 127(11.7) Definition of "adjusted selling cost"
Subsection 127(11.7) Definition of "adjusted service cost"
Subsection 127(12.1) Allocation of ITC from a partnership reduces the pool of deductible SR&ED expenditures
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate
Subsection 127(23) Partnership taxation year
Subsection 127(24) Exclusion from qualified expenditures
Subsection 127(25) Deemed contract payment
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(30) Addition to tax – partnership
Subsection 127(31) Tiered partnership
Subsection 127(33) Certain non-arm's length transfers
Subsection 127(35) Recapture of investment tax credit – non-arm’s length dispositions, partnerships
Subsection 127.1(2) Definition of "refundable investment tax credit"
Subsection 127.1(2.01) Additions to refundable investment tax credit
Subsection 248(1) Definition of "person"
Subsection 248(1) Definition of "professional corporation"
Subsection 248(1) Definition of "specified member"
Subsection 248(1) Definition of "taxpayer"
Subparagraph 249.1(1)(b)(ii) Definition of "fiscal period" – partnership
List of regulations
Income Tax Regulations Description
Subsection 229(1) Partnership return
Subsection 229(2) Partnership return
Subsection 229(5) Partnership return
Subsection 2900(10) Deemed to be a corporation and associated

Appendix B – Revision

B.1 Explanation of changes

The following are the explanation of changes to the SR&ED Claims for Partnerships Policy as part of the revision of December 18, 2014:

Section 1.0 has been revised to delete the first sentence of the previous policy which mentioned that this policy document was a consolidation of the CRA publications that deal with partnerships that file SR&ED claims.

Section 4.3, the first paragraph of this section has been edited to explain that the SR&ED expenditures and the prescribed information in respect of the expenditures should be identified on the partnership's Form T661.

Additional wording has been provided in section 4.3 to explain when the partnership T661 should be filed in order that all members have time to meet their deadline to claim the SR&ED investment tax credit allocated to them.

Sections 4.8.1, 4.8.3 and 4.10 have been revised to reflect the change in legislation for ITC rates. After 2013 the basic ITC rate is 15%; for tax years that end before 2014 the basic ITC rate is 20%. For tax years that include January 1, 2014, the reduction in the basic ITC rate is pro-rated based on the number of days in the tax year that are after 2013.

Section 4.10 now indicates in the last sentence of the first paragraph that starting in 2014 capital expenditures no longer qualify for SR&ED tax incentives.

Appendix A.2 "CRA publications" has been removed.

Other minor formatting and editing corrections were made throughout the document.

Date modified: