Third-Party Payments Policy

 Date: December 18, 2014

Changes to Third-Party Payments Policy

Reasons for revision

This revision accommodates the legislative changes that have been announced.

The list of granting councils has been updated.

Revision overview

Only 80% of a third‑party payment made after 2012 qualifies for an investment tax credit.

Expenditures for capital or lease costs incurred after December 31, 2013 no longer qualify for scientific research and experimental development (SR&ED) tax incentives.

The list of granting councils has been corrected to include the Canadian Institutes of Health Research.

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

Table of contents


1.0 Overview

1.1 Purpose

This policy document deals with payments to third-party entities for scientific research and experimental development (SR&ED). These payments are called third-party payments. The purpose of this document is to clarify the position of Canada Revenue Agency (CRA) regarding third-party payments when administering the SR&ED legislation under the federal Income Tax Act and the Income Tax Regulations.

This document:

  • Gives an overview of the types of entities to whom a third-party payment can be made;
  • Explains the criteria to be met so a payment to each type of entity may be considered eligible;
  • Highlights the considerations to be made when making payments to research chairs;
  • Highlights the differences between third-party payments and contract expenditures for SR&ED performed on behalf of the claimant;
  • Outlines the process and criteria for certain entities to become "approved"; and
  • Informs agricultural organizations and agricultural producers about available SR&ED investment tax credits.

1.2 Policy

The term third-party payments is not specifically defined in the Act. A third-party payment is generally a payment made to an entity to be used for SR&ED carried on in Canada, that is related to the claimant’s business (see section 4.0) and the claimant must be entitled to exploit the results (see section 5.0) of the SR&ED. For this policy, such payments are those made to third-party entities for SR&ED as described in subparagraphs 37(1)(a)(i.1) [an A entity], 37(1)(a)(ii) [B to E entities] and 37(1)(a)(iii) [an F entity] of the Act. For a description of the A to F entities, please refer to section 2.1 below. For the specific requirements of payments to the various entities, please refer to sections 2.1.1 to 2.1.3. For information on the amount of third-party payments that are included in qualified SR&ED expenditures for investment tax credit purposes, see section 2.3.

Third-party payments do not refer to payments for SR&ED directly undertaken by the claimant (SR&ED performed by the claimant) nor does it refer to contract expenditures for SR&ED performed on behalf of the claimant. However, it can be difficult to distinguish between contracts for SR&ED performed on behalf of a claimant and payments that are made to certain third-parties to be used for SR&ED in Canada. For a comparison between third-party payments and contract expenditures for SR&ED performed on behalf of the claimant, please refer to the table in section 10.1. For more information on contract expenditures for SR&ED performed on behalf of the claimant, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

Agricultural producers can access ITCs earned on contributions made to agricultural organizations that fund SR&ED through agricultural check-off dues (see section 8.0).

2.0 Legislation

2.1 Types of entities to whom third-party payments can be made

A claimant can make third-party payments to the types of entities listed below (subject to the requirements stated in sections 2.1.1 to 2.1.3).

Types of entities:

A entity – Corporations resident in Canada;

B entity – Approved associations;

C entity – Approved universities, colleges, research institutes, or similar institutions;

D entity – Non-profit-SR&ED corporations resident in Canada and exempt from tax under paragraph 149(1)(j) of the Income Tax Act;

E entity – Approved organizations (granting councils) that make payments to an association, institution, or corporation identified as a B, C, or D entity; and

F entity – Non-profit-SR&ED corporations resident in Canada and exempt from tax under paragraph 149(1)(j) of the Act, for SR&ED that is basic or applied research carried on in Canada.

Legislative references Income Tax Act
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Subparagraph 37(1)(a)(iii) Pool of deductible SR&ED expenditures – third-party payments to exempt corporations
Paragraph 149(1)(j) Non-profit corporations for SR&ED

2.1.1 Requirements for third-party payments to an A entity

Third-party payments to an A entity must meet the following conditions:

  • be paid to a corporation resident in Canada to be used for SR&ED carried on in Canada;
  • the SR&ED must be related to a business of the claimant; and
  • the claimant must be entitled to exploit the results of that SR&ED.

The SR&ED tax incentive earned on payments to an A entity is available only in the year in which the SR&ED is performed, rather than in the year in which it is paid. Whereas, third-party payments to other entities earn SR&ED tax incentives in the year in which it is paid.

Legislative references Income Tax Act
Paragraph 18(9)(a) Limitation of prepaid expenses
Paragraph 18(9)(d) Limitation of prepaid expenses excluded for certain third-party payments
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation

2.1.2 Requirements for third-party payments to B to E entities

Third-party payments to B to E entities must meet the following conditions:

  • be used for SR&ED carried on in Canada;
  • the SR&ED must be related to a business of the claimant; and
  • the claimant must be entitled to exploit the results of that SR&ED.

Legislative reference Income Tax Act
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities

2.1.3 Requirements for third-party payments to an F entity

Third-party payments to an F entity must meet the following conditions:

  • be from a claimant that is a corporation;
  • be to a corporation that is resident in Canada, that is exempt from tax due to paragraph 149(1)(j) of the Act;
  • be for SR&ED that is basic or applied research, that also has applications in other types of businesses not related to the business of the claimant; and
  • the primary purpose for the payment is for the claimant to use the results from the basic or applied research in conjunction with other SR&ED undertaken or to be undertaken, directly by or on behalf of the claimant, that relates to a business of the claimant.

Payments for this type of research must be made by a corporation to a non-profit corporation as defined under paragraph 149(1)(j) of the Act. The non-profit corporation is set up specifically to carry on or promote SR&ED in Canada, whether directly or by payment to another institution. The intent is to allow the formation of consortia to carry out broadly based, precompetitive research that would have applications in more than one type of business.

Legislative references Income Tax Act
Subparagraph 37(1)(a)(iii) Pool of deductible SR&ED expenditures – third-party payments to exempt corporations
Paragraph 149(1)(j) Non-profit corporations for SR&ED

2.2 Examples

2.2.1 Examples of third-party payments

The following are examples of third-party payments where the criteria in sections 2.1.1 to 2.1.3 have otherwise been met:

Example 1

Payments for industry-wide SR&ED carried out by an approved industrial research institute, where the claimant's business is in the same industry.

Example 2

Payments are made by a physician to fund basic medical research at a university in the physician's field of specialization.

Example 3

A pharmaceutical corporation makes a payment to a university for drug research, and their agreement gives the company the rights to any patents that result from the research.

2.2.2 Examples not considered third-party payments

Example 1

A construction business makes a donation to a hospital for medical research. Although SR&ED may be done, in general it would be unrelated to the business, and the business would be unable to make use of the results of the research. Therefore the payment fails the related-to-a-business (see section 4.0) and entitled-to-exploit-the-results (see section 5.0) tests.

Example 2

A physician makes a payment to a general fund of the faculty of medicine of a university, but the donation does not specify a use for the payment. Although some of the funds may support SR&ED that the physician may exploit, some of the funds may be, and probably will be, used for purposes that are not SR&ED. Therefore the payment fails the must-be-used-for-SR&ED test.

2.3 Amount of third-party payments included in qualified SR&ED expenditures

For a third-party payment made before the 2013 calendar year, 100% of the payment is included in qualified SR&ED expenditures for investment tax credit purposes. For a third-party payment made after the 2012 calendar year, only 80% qualifies for investment tax credit purposes (20% of the third-party payment is removed from qualified SR&ED expenditures).

For more information on qualified SR&ED expenditures, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Legislative references Income Tax Act
Subsection 127(9) Definition of “qualified expenditure”

3.0 Payments must be for SR&ED

To be considered as a third-party payment, a payment made by the claimant must be for the purposes of SR&ED. The claimant's obligation is to show that the payments are made for SR&ED.

Third-party payments must be made only for SR&ED work. When a payment is made for a combination of SR&ED work and non-SR&ED work, the payment will not qualify as a third-party payment. For more information on what is SR&ED, please refer to the Eligibility of Work for SR&ED Investment Tax Credits Policy. An exception to this rule is made in the case of research chairs, where a portion of a payment for SR&ED is allowed as a third-party payment under certain circumstances (see section 7.1).

Legislative references Income Tax Act
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Subsection 248(1) Definition of "SR&ED"

4.0 Related to a business of the claimant

For A to E entities (see section 2.1), a third-party payment must be related to a business of the claimant. Whether a payment is to be used for, or an expenditure is made on or in respect of, SR&ED that is related to a claimant's business is generally a question of fact, which must be determined on a case-by-case basis.

Legislative references Income Tax Act
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities

4.1 Interconnection or beneficial application

For SR&ED to be related to a business carried on by a claimant, it is necessary to have some interconnection or link between the SR&ED work and the general area of the claimant's business. For greater certainty, SR&ED related to a business includes any SR&ED that may lead to, or facilitate, an extension of that business.

The requirement for SR&ED to be related to a business of the claimant will generally be satisfied when the results of the SR&ED, if successful, have a direct and beneficial application in the business that is carried on by the claimant.

Legislative reference Income Tax Act
Paragraph 37(8)(b) SR&ED expenditures related to a business, extended

4.2 Basic research can be related to a business of the claimant

The Income Tax Act states that one kind of SR&ED is basic research, which is work undertaken for the advancement of scientific knowledge without a specific practical application in mind.

Although for basic research the outcome and applicability of the results is inherently unpredictable, there may be beneficial results for the claimant from the SR&ED, whatever its outcome. Therefore basic research can be related to a business if the outcome could have a direct and beneficial application to a claimant's business. In other words, there must be the potential to gain knowledge from the SR&ED.

For example, a pharmaceutical corporation might fund basic research in chemistry or biology. The results could have the potential of benefiting the corporation. Therefore this kind of research could be related to its business.

However, a corporation in the software business funding basic research in chemistry would probably not be able to use the results of any such research. Therefore it would not meet the related-to-a-business test.

Legislative reference Income Tax Act
Paragraph 37(8)(c) SR&ED expenditures related to a business, restriction

4.3 When SR&ED is considered a business

The prosecution of SR&ED, in and by itself, is only considered a business of the claimant to which the SR&ED relates, if the claimant derives all or substantially all of its revenue from the prosecution of SR&ED. For this purpose, a claimant deriving 90% or more of its revenue from the prosecution of SR&ED is considered to derive all or substantially all of its revenue from the prosecution of SR&ED.

Legislative reference Income Tax Act
Paragraph 37(8)(c) SR&ED expenditures related to a business, restriction

4.3.1 Revenue from the prosecution of SR&ED

Revenue from the prosecution of SR&ED includes revenue from the sale of rights in, or arising out of, SR&ED carried on by the taxpayer. Income from the performance of SR&ED carried out on behalf of another taxpayer is generally considered to be revenue from the prosecution of SR&ED. Royalties earned from licensing the results of SR&ED or from the sale of such results (for example, a patent) are also generally considered to be revenue derived from the prosecution of SR&ED.

However, if a taxpayer contracts with another person for SR&ED to be performed on the taxpayer’s behalf, the taxpayer cannot be said to derive “all or substantially all of the taxpayer’s revenue from the prosecution of SR&ED carried on by the taxpayer” if the taxpayer pursues no activities, other than retaining the rights pertaining to any results from the SR&ED performed and commercializing these rights or results.

Furthermore, revenue derived from the commercial exploitation of products or processes developed by using the know-how does not constitute revenue from the prosecution of SR&ED within the meaning of deriving “all or substantially all of the taxpayer’s revenue from the prosecution of SR&ED carried on by the taxpayer”. Rather it constitutes the sale of finished products. Income from a transaction that involves a licence but is in substance a sale of a finished product (for example, application software) is not considered to be revenue derived from the prosecution of SR&ED.

Revenue arising from the prosecution of SR&ED generally envisages the provision of scientific research for a fee or a sale of the know-how developed.

Legislative reference Income Tax Act
Paragraph 37(8)(c) SR&ED expenditures related to a business, restriction

4.4 Business carried on by a related corporation

Where a corporate claimant performs SR&ED that is related to a business actively engaged in by another corporation that is related to the claimant at the time the claimant makes an expenditure or payment for SR&ED, the SR&ED is considered to be related to a business of the claimant at that time.

For example, if the claimant performing SR&ED is a wholly owned subsidiary of another corporation, the subsidiary's SR&ED will be considered to be related to a business of the claimant if the SR&ED is related to a business carried on by the parent. The parent must be actively engaged in the business at the time the subsidiary makes the expenditure, or payment for, SR&ED. In determining whether two corporations are related, the determination is to be made without reference to a right (control by right) referred to in the Act. For more information on related corporations, please refer to Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.

Legislative references Income Tax Act
Subsection 37(1) Deductible SR&ED expenditures
Subsection 37(1.1) SR&ED related to a business of a related corporation
Paragraph 37(8)(c) SR&ED expenditures related to a business, restriction
Paragraph 251(5)(b) Control by related groups, options, etc. – by right

5.0 Entitlement to exploit the results

To be entitled to exploit the results of the SR&ED, a claimant must have gained the right to use the results of the SR&ED in their business as a direct result of the payment. Whether a claimant is entitled to exploit the results of the SR&ED is a question of fact and will be determined on a case-by-case basis.

5.1 Two basic situations

5.1.1 Resulting in a product or patent

If the SR&ED results in a product or patent, then this requirement could be satisfied if the claimant has the right to use a resulting patent (even for a royalty), or where the claimant is entitled to distribute or market any resulting product. If the claimant cannot use the patent or can only obtain the product through normal commercial channels, this requirement would not be satisfied.

5.1.2 Resulting in a gain of knowledge

If the SR&ED does not result in a product or patent, but results in a gain of knowledge (such as by publication of a scientific paper), then one way this requirement could be satisfied is if the claimant has, as a consequence of the payment, been granted a preferential right to use the results of the SR&ED (the knowledge gained) in its business. A preferential right could be access to unpublished results, or early access to results. If results are presented at a conference or published in a journal, this requirement could be met if the sponsor received a prepublication print of the paper. If the results of the SR&ED are in the public domain before the sponsor receives them, then that would not be considered to be a preferential right.

5.2 Payer must be entitled

To meet the requirement of being entitled to exploit the results of the SR&ED, it is the claimant making the third-party payment who must be entitled to exploit the results of the SR&ED.

For example, a claimant (who is a shareholder of a corporation and who makes a payment) will not meet this requirement if it is the corporation that will be entitled to exploit the results of the related SR&ED. The shareholder and the shareholder's corporation are separate and distinct entities under the Income Tax Act.

6.0 Types of third-party payments that qualify

Assuming that the requirements for third-party payments to A to F entities are met (see sections 2.1.1 to 2.1.3), payments could be direct financial contributions, funding of students or employees doing the SR&ED, or payments in kind.

6.1 Payments in kind

If property or a service is supplied for the prosecution of SR&ED, a claimant may be able to claim the fair market value as a payment. There are two issues to consider for payments of this nature:

6.1.1 Valuation of the property or service provided

In determining the amount of the third-party payment for SR&ED, the fair market value of the property or services must be used. The claimant is responsible to provide evidence indicating the fair market value of the property or service.

6.1.2 Conditions under which the property or service is provided

The property or service must be provided to the university or college, without any conditions involving direct or indirect payments back to the claimant. Where payments in kind involve property or services that are provided conditionally to the university or college, the amount that may be claimed as a third-party payment for SR&ED will be determined on a case-by-case basis.

6.2 Cost of a building

After December 31, 2013:

Expenditures for capital property, or for the use of or the right to use capital property, made after 2013 do not qualify for SR&ED tax incentives. Thus, third-party payments made after December 31, 2013 to certain entities used to acquire a building, a leasehold interest in a building, or to pay an amount in respect of the rental expense, will no longer qualify for SR&ED tax incentives.

Prior to January 1, 2014:

The provision of a building is restricted. In general, a claimant cannot claim the cost of a building unless it is a prescribed special-purpose building. For more information on prescribed special-purpose building, please refer to the SR&ED Capital Expenditures Policy.

However, there are exceptions where third-party payments to certain recipient entities may be used to acquire a building, a leasehold interest in a building, or to pay an amount in respect of the rental expense. The following exceptions apply as long as the building is to be committed solely for SR&ED in Canada.

The exceptions are:

  • A claimant makes a payment to an approved research institute or an approved association (see section 2.1), and the recipient entity uses the payment to acquire a building, a leasehold interest in a building, or to pay an amount in respect of the rental expense of a building, provided the claimant deals at arm’s length with the recipient entity.
  • A claimant makes a payment to an approved university, college, or organization (see section 2.1), and the recipient uses the payment to acquire a building, a leasehold interest in a building, provided the claimant has no ownership or leasehold interest in the building.

The requirements for payments to the recipient entities must still be met (see section 2.1.2) for a payment to qualify as a third-party payment.

Legislative references Income Tax Act
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Subparagraph 37(1)(a)(iii) Pool of deductible SR&ED expenditures – third-party payments to exempt corporations
Former paragraph 37(8)(d) SR&ED expenditures specifically excluded
Paragraph 37(8)(d) SR&ED expenditures specifically excluded

7.0 Research chairs

Research chairs are academic appointments for the main purpose of doing research in a specified area. The appointments come with all or part of the salary for the appointee, and may include money for research assistants and equipment.

Research chairs are normally intended to fund a certain amount of research work, as well as other activities. If this research work qualifies as SR&ED under the Income Tax Act and the other requirements of the legislation are met (see section 2.1), then, it would be reasonable to consider the portion of the payment that funds the SR&ED as a third-party payment for SR&ED.

Legislative reference Income Tax Act
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities

7.1 Portion of payment for research chairs

A portion of a payment for a research chair will be considered as a third-party payment, if the claimant is able to clearly identify the portion of the total payment that is made for SR&ED.

7.1.1 Conditions for allowing portion of payment

When a claimant makes a payment to a university or college to fund a research chair, and a portion of the payment meets the requirements of the Act for third-party payments for SR&ED, this portion can be claimed as a third-party payment, as long as the following conditions are met:

  • To identify the portion, the CRA requires a written agreement between the claimant and the university or college that specifies what work the chair will fund and how the money will be allocated to this work. The CRA requires, as well, a schedule tracking the costs of the chair so that the SR&ED expenditures can be substantiated.
  • The written agreement specifies the percentage of the researcher's time to be directly spent on SR&ED. This percentage will be used in determining the portion of the salary cost that is attributable to SR&ED. The SR&ED portion will not include time spent on teaching, administrative duties, or other non-SR&ED activities of the chair.
  • The university or college periodically reports to the claimant on the expenditures incurred for SR&ED, according to a schedule identified in the written agreement. The reports should itemize categories of expenditures, such as equipment and salaries. The CRA may choose to verify the expenditures identified in such reports by reviewing the records of the university or college.
  • The payment, or a portion of the payment, is intended to fund SR&ED activities of the chair. If the payment is invested and only the investment income is used for SR&ED, only the principal portion of the payment paid in the year, or the portion thereof, that applies to the SR&ED, as specified in the written agreement, will be considered to be used for SR&ED.

7.2 Natural Sciences and Engineering Research Council industrial research chairs

Natural Sciences and Engineering Research Council (NSERC) industrial research chairs fund research at universities in natural sciences and engineering. To receive NSERC funding, the research done by the chair must present unique industrial opportunities, respond to industrial need, and be related to the business. The industrial sponsor must demonstrate the ability to preferentially exploit the proposed research results. Since the scientific merit of the research proposal is judged by a visiting NSERC expert-committee, the originality and quality of the research and its benefits to industry are affirmed before the chair is funded.

NSERC usually matches only the industrial cash contribution to the chair. The NSERC industrial research chair's non-research duties are reduced as a condition of the NSERC grant. Also, NSERC reviews the chairs regularly to ensure that the financial and research commitments are being met.

In contrast to other research chairs, NSERC industrial research chairs are usually eligible because they typically meet the must-be-used-for-SR&ED test.

The industrial contribution to the NSERC industrial research chair that is matched by the NSERC grant to the university, for the chair, is an eligible expenditure as a third-party payment to fund SR&ED, after the industrial contribution has been made.

7.3 Investment income from upfront payments

One mechanism for funding research chairs provides for upfront payments to be made by a claimant. The money is then held in a fund by the university or college and used to fund the chair over a number of years. The fund will normally earn investment income during this time. This investment income will not be considered as part of the third-party payment. When the money is transferred, the claimant gives up all rights to it, including the right to any income that is earned. Any income will be income of the university or college, not of the claimant.

8.0 Agricultural check-off dues

The CRA has a process, within the legislative framework, by which agricultural producers can access investment tax credits (ITCs) earned on contributions made to agricultural organizations that fund SR&ED.

8.1 Agent-principal relationship

The Income Tax Act allows only taxpayers to claim ITCs on SR&ED. For the producers to receive the ITCs under the Act, the agricultural organization may act as an agent for the producers in matters relating to SR&ED. In effect, all SR&ED transactions by agricultural organizations will constitute a transaction made by producers. Contributions will then be considered as a payment directly from the producers to the performers of the SR&ED.

8.1.1 Meeting the requirements of an agent-principal relationship

To satisfy the agent-principal characterization for SR&ED, agricultural organizations and producers have to satisfy the following requirements:

  • Agricultural organizations should amend their bylaws / regulations to reflect that they are acting as agents for producers in all matters relating to SR&ED. As an alternative, agricultural organizations may pass a resolution at each of their annual general meetings providing the same provisions.
  • A committee comprised of agricultural organization executives and representative agricultural producers needs to be put into place to deal with all matters relating to SR&ED. This committee will be responsible for all SR&ED funded in the year, as well as the amount of producer-contributed money invested in SR&ED. If a board of directors is already structured to fulfill these requirements, the establishment of a second committee is not necessary.
  • For purposes of review, agricultural organizations must maintain books and records that identify the funds received and distributed for SR&ED, as well as minutes from committee meetings where SR&ED projects receive funding authorization.

8.2 Requirements for contributions to qualify

For the SR&ED program, the portion of contributions by producers to agricultural organizations which funds SR&ED is called third-party payments. To qualify under the program, payments must be made to an entity that is one of the following types:

B entity – Approved associations
C entity – Approved universities, colleges, research institutes
D entity – Non-profit-SR&ED corporation

(see section 2.1)

For these payments to qualify as a third-party payment, the criteria stated in section 2.1.2 must be met.

8.3 Responsibilities of the agricultural producers

1) Producers must have contributed monies to agricultural organizations through agricultural check-off dues or cash payments. The organizations then make payments to approved B, C, or D entities (see section 8.2).

2) The SR&ED has to be related to the producer's business.

3) Producers must have a preferential right to exploit the results of the SR&ED.

4) Producers, through their membership on a joint agricultural organization / producer committee, must direct which SR&ED projects will be funded in the year.

5) Producers have to maintain documentation that:

  • supports their third-party contributions; and
  • identifies the percentage of the contribution that was allocated to SR&ED projects (as communicated from the agricultural organization).

6) Claims for agricultural check-off dues may originate from agricultural producers who are either proprietors or corporations. A proprietorship has to file Form T2038(IND), Investment Tax Credit (Individuals). A corporation has to file Schedule T2SCH31, Investment Tax Credit – Corporations. For more information on SR&ED filing requirements, please refer to the SR&ED Filing Requirements Policy.

Agricultural check-off claims filed by producers may or may not be accompanied by Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, depending on whether they are claiming SR&ED ITCs other than those for agricultural check-off dues. Form T661 is filed separately by agricultural organizations on behalf of their member producers and may not coincide with the filing of Form T2038(IND) or Schedule T2SCH31 by agricultural producers.

8.4 Responsibilities of the agricultural organizations

1) Agricultural organizations must act as agents for contributing producers in all SR&ED matters. This characterization should be reflected in the organization's bylaws or regulations, or as a resolution passed at the annual general meeting providing the same authority.

2) Agricultural organizations must make payments for SR&ED to an approved B, C, or D entity (see section 8.2).

3) Agricultural organizations must make sure that producers have a preferential right to exploit the results of the SR&ED.

4) Agricultural organizations must have in place a committee comprised of organization executives and producer representatives for the purpose of determining the SR&ED projects that will be funded each year. Minutes must be maintained for each committee meeting. A board of directors can fulfill this capacity, as long as agricultural producers have representation on the board.

5) To help the agricultural producers in receiving their tax credit entitlements on a timely basis, agricultural organizations are encouraged to file one Form T661 each year on behalf of their members within six months of the agricultural organization’s tax year-end. Failure to file a Form T661 for any tax year will result in the agricultural producer's entitlement to the tax credit being disallowed for that year. A completed Form T661 should be sent to the tax centre in the agricultural organization's region.

6) The amount of the SR&ED payments made by the agricultural organization should be included on the “Third-party payments” line of Form T661.

7) Agricultural organizations must maintain the necessary books and records so that the CRA can review the contributions received and distributed for SR&ED.

8) If a producer cannot determine the SR&ED contribution, the agricultural organization will try to provide that information.

9) Agricultural organizations must provide each contributing producer with information identifying the percentage of the total contribution that was used to fund SR&ED in the year.

10) Agricultural organizations will be responsible for advising agricultural producers in which province or territory the SR&ED was performed. To qualify for a provincial / territorial SR&ED ITC in provinces and territories that have their own SR&ED tax incentive program, it is a requirement that the SR&ED be performed in that province or territory. For more information on tax incentive programs in the provinces and territories, please refer to the provincial and territorial site.

8.5 Questions and answers

Question 1

How will contributions in kind, be treated? Will the value of these costs be eligible for ITCs?

Contributions in kind include costs incurred by agricultural producers for such things as testing an SR&ED process or product using their time, property, and equipment. As long as the agricultural producers can identify these costs as they relate to SR&ED projects, some costs may qualify. No consideration will be given to lost production value of a piece of land or equipment used for the prosecution of SR&ED. For a proprietorship, no consideration will be given to the time the proprietor producer expends on an SR&ED project.

Question 2

Can agricultural producers claim ITCs on agricultural check-off dues or levies that are refunded by agricultural organizations?

Agricultural producers can only claim payments that are used by agricultural organizations for SR&ED. If agricultural organizations have refunded payments, producers may not make a claim for ITCs on any portion refunded.

Question 3

If agricultural organizations fund SR&ED work to be performed outside of Canada, will the contribution qualify for the ITCs?

Only contributions for SR&ED performed in Canada qualify for the ITCs.

Question 4

How do agricultural producers get the preferential rights to exploit the results of projects?

Agricultural producers must have access to the research results before anyone who is not a contributor. The distribution of research results to contributing producers by agricultural organizations should satisfy this requirement.

Question 5

For money contributed to an agricultural organization, how does an agricultural producer identify the amount that was invested in SR&ED?

Contribution information generally comes from one of two sources. It may come from the agricultural producer's commodity sales receipt, which may have the check-off dues allocation identified on it, or from the agricultural organization, to which the producer has contributed the funds. Agricultural producers, at the end of the year, need to determine total contributions for purposes of calculating the SR&ED apportionment.

Question 6

For purposes of calculating ITCs, how will agricultural producers know what portion of the total contributions were allocated to SR&ED?

Each agricultural organization will be responsible for providing agricultural producers with the percentage of the total contributions allocated to SR&ED for the year.

Question 7

In instances where agricultural producers contribute to a number of agricultural organizations that invest in SR&ED, does only one Form T2038(IND) or Schedule T2SCH31 need to be filed?

Yes. Agricultural producers will have to identify the agricultural check-off dues or levies that were contributed to each organization and then claim the portion of the contribution (as identified by the organization) allocated to SR&ED. The allocations will be totalled, and the ITCs calculated at the appropriate rate.

Question 8

How does an agricultural organization determine if a project to be funded would be SR&ED under the program?

In addition to information publications, including the Eligibility of Work for SR&ED Investment Tax Credits Policy, the SR&ED program provides a service called Pre-Claim Consultation. This is a free, on-demand service that tells businesses whether their work is eligible for SR&ED tax credits.

Question 9

What if a provincial or territorial agricultural organization distributes an agricultural producer's monies to a national agricultural organization that then pays a research institute to do SR&ED? Will the agricultural producer still qualify to claim ITCs?

The agricultural producer will continue to qualify for ITCs as long as, at each level, the agricultural organization acts as an agent for the agricultural producer and all other conditions are met.

Question 10

How will agricultural organizations know if the research institute or university doing the SR&ED is "approved"?

All Agriculture and Agri-Food Canada (AAFC) research institutes and all Canadian universities are "approved". Any other research institutes or associations should be able to produce a document from the Income Tax Rulings Directorate of the CRA that identifies them as "approved".

9.0 Documentation

9.1 Documentation for facilitation of claims

In addition to completing Form T661, a completed Form T1263, Third-Party Payments for Scientific Research and Experimental Development (SR&ED), is essential and must be completed for each third-party payment made.

Claimants may be requested by the CRA to provide proof for the answers given on Form T1263.

Documentation must be available to show:

  • to whom and for what the payments were made, and the amount of the payments;
  • that the payments were for the prosecution of SR&ED in Canada;
  • that the SR&ED relates to the claimant's business; and
  • that the claimant is entitled to exploit the results of the SR&ED.

If a payment does not meet any of the criteria for A to F entities (see sections 2.1.1 to 2.1.3), the claimant will be notified of the deficiency.

9.2 Documentation for approved entities

If a payment is made to an entity (see section 2.1) that needs to be "approved" (see section 11.1), then the payments will not be deductible as third-party payments unless the entity is, in fact, "approved".

The approval given by the Minister of National Revenue is based on information given, and representations made, by an entity when it applies for approval. Changes in the entity or the activities of an entity may affect its approved status.

To determine whether an entity has been "approved" by the CRA, a claimant should consult the list of certain approved entities in Appendix A, or if the name is not indicated there, contact the entity in question.

If an entity is not "approved", the claimant will be notified of the deficiency and notified that the claim for the subsequent period for the same third-party payment recipient will be disallowed unless the third party comes forward for formal approval as outlined in this policy or meets other criteria which would otherwise allow payments to be legislatively acceptable.

10.0 Third-party payments compared to contract expenditures for SR&ED performed on the behalf of the claimant

Under the Income Tax Act,  a claimant can make payments to certain entities to be used for SR&ED. The amounts are usually referred to as third-party payments for SR&ED and are reported on “Third-party payments” line of Form T661. They do not include payments for contract expenditures for SR&ED performed on behalf of the claimant which are reported on their own lines of Form T661. The following table shows the differences between third-party payments and contract expenditures for SR&ED performed on behalf of the claimant.

10.1 Characteristics of third-party payment vs contract expenditures for SR&ED performed on the claimant's behalf

Characteristic Third-party payment Contract expenditures for SR&ED performed on the claimant's behalf
Control of SR&ED Performer Payer
Rights Non-exclusive (generally published) but preferential right to exploit results is required Exclusive
Number of funders Usually more than one payer Usually limited to one payer
Type of SR&ED Often basic or applied research Commercially focused
Tax treatment Generally cash basis Accrual

10.1.1 Control

One key distinction between third-party payments and contract expenditures for SR&ED performed on behalf of the claimant is that payments for SR&ED performed on behalf of the claimant are generally made to contractors for tasks or pieces of work. In such cases, the claimant rather than the contractor would control the work. For third-party payments, the claimant generally does not control the work performed.

10.1.2 Rights

In a contract situation, SR&ED services are performed for a payer who receives the rights to the SR&ED. The entitlement to the SR&ED tax incentive occurs at the time the SR&ED is performed.

In comparison, a third-party payment situation gives the payer entitlement only to the results of the SR&ED.

10.1.3 Tax treatment

Unlike contract expenditures for SR&ED performed on behalf of the claimant, third-party payments, with the exception of payments to an A entity (see sections 2.1), become eligible for the SR&ED tax incentive at the time the payment is made (cash basis), rather than at the time the SR&ED is performed (accrual basis) (see section 2.1.1).

Legislative reference Income Tax Act
Paragraph 18(9)(d) Limitation of prepaid expenses excluded for certain third-party payments
Subsection 37(1) Deductible SR&ED expenditures
Subsection 127(26) Unpaid amounts

11.0 Process for B to F entities to become "approved"

This section outlines the approval process, required documentation, and determination criteria for the B to F entities described in section 2.1 of this document.

11.1 "Approved"

The term "approved" (as used for SR&ED purposes) refers only to the approval, by the Minister of National Revenue, of:

  • institutes
  • associations
  • other organizations

The term "approved" does not apply to SR&ED claims or programs. To determine whether an institution or association has been "approved" by the Minister of National Revenue for purposes of section 37 of the Income Tax Act, a claimant should check the list of approved entities in Appendix A, or if the name is not indicated there, contact the entity in question.

Legislative reference Income Tax Act
Subsection 37(7) Definition of "approved"

11.2 A entity – Corporation—no approval required

Assuming that the requirements of an A entity are met (see section 2.1.1), an amount paid to a corporation resident in Canada will be recognized as an eligible SR&ED third-party payment. For this type of entity, approval is not required from the Income Tax Rulings Directorate.

Legislative reference Income Tax Act
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation

11.3 B and C entities – Universities, colleges, and other entities

11.3.1 B and C entities – Universities and colleges are "approved"

All Canadian universities and affiliated colleges are considered to be "approved".

Legislative reference Income Tax Act
Clause 37(1)(a)(ii)(B) Pool of deductible SR&ED expenditures – third-party payments to university, college, research institute, other

11.3.2 B and C entities – Other entities—requesting approval

All B and C entities listed in section 2.1 of this document, other than Canadian universities and affiliated colleges, must receive written approval from the Minister of National Revenue through the Policy and Legislation Branch. To be considered "approved" for the purposes of subsection 37(7) of the Act, entities should write to:

Income Tax Rulings Directorate
Policy and Legislation Branch
Canada Revenue Agency
16th Floor, Tower A
Place de Ville
320 Queen Street
Ottawa ON K1A 0L5

Please refer to the IC70-6R7 – Advance Income Tax Rulings and Technical Interpretations for Information to be included with a Ruling request.

For a list of approved B and C entities (as described in section 2.1) that have agreed to be published, see Appendix A.

Legislative references Income Tax Act
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Subsection 37(7) Definition of "approved"

11.3.2.1 B and C entities – Other entities—requirements for approval

As outlined in section 11.1, an association, research institute, or other similar institution must be "approved". For an entity to become an approved association, it must meet the criteria for a non-profit organization. Also, to be considered for approved status by the Income Tax Rulings Directorate, an association, research institute, or other similar institution, must be able to show that it meets all of the following requirements:

  • the entity must have the facilities, equipment, and personnel capable of carrying out SR&ED as defined in the Act;
  • the entity must carry on only activities that are unquestionably SR&ED;
  • to satisfy the requirements for non-profit status, there must be no personal benefits to members, no control of other associations, and satisfactory provisions for distributing assets upon dissolution;
  • the general public must be a beneficiary of the results of any successful research; and
  • the funding of the association or research institute must be enough to ensure ongoing SR&ED.

Legislative references Income Tax Act
Clause 37(1)(a)(ii)(A) Pool of deductible SR&ED expenditures – third-party payments to approved association
Clause 37(1)(a)(ii)(B) Pool of deductible SR&ED expenditures – third-party payments to university, college, research institute, other
Paragraph 149(1)(j) Non-profit corporations for SR&ED

11.3.2.2 B and C entities – Other entities—documentation needed for approval

A written request to the Income Tax Rulings Directorate has to include, in addition to information showing that the above requirements are met, copies of the following documentation relating to the association or research institute and its activities:

  • copies of the entity's charter, code of ethics, letters patent, or bylaws indicating that the entity satisfies all requirements for B and C entities (see section 2.1.2), as well as how its property will be distributed in the event of a windup;
  • detailed description of the entity's arrangements for obtaining funds;
  • detailed description of the entity's arrangements for disbursing funds;
  • financial statements for previous years (if any); and
  • details of the research activities to be carried out by the entity in the future, and evidence that it has the staff, equipment, and facilities to carry out such activities.

Legislative references Income Tax Act
Clause 37(1)(a)(ii)(A) Pool of deductible SR&ED expenditures – third-party payments to approved association
Clause 37(1)(a)(ii)(B) Pool of deductible SR&ED expenditures – third-party payments to university, college, research institute, other

11.4 D and F entities – Non-profit-SR&ED corporations

11.4.1 D and F entities – Determination for non-profit-SR&ED corporations

The determination of whether a corporation will qualify as a non-profit-SR&ED corporation is a question of fact. The determination can only be made by the tax services office after the entity's corporate income tax return for a tax year is filed and the activities of the corporation are reviewed.

Legislative reference Income Tax Act
Paragraph 149(1)(j) Non-profit corporations for SR&ED

11.4.2 D and F entities – Non-profit-SR&ED corporation criteria

The following criteria must be met by a corporation in order to be considered a non-profit-SR&ED corporation in a tax year:

  • The corporation's activities must be carried on without the purpose of gain for its members. Any profits or other accretions shall be used in promoting the corporation's objectives. No part of the income may be payable to or otherwise available for the personal benefit of any member thereof.
  • The directors and members, including any director or member who also serves as an officer, shall serve in that capacity without remuneration. No director, member, or officer shall directly or indirectly receive any profit from his / her position as director, member, or officer. However, it is permitted that a director or officer may be reimbursed for reasonable expenses incurred by him / her in the performance of his / her duties.
  • The corporation must not acquire control of any other corporation nor will it carry on any business, as the term business is used in the Act.
  • The objects of the corporation must be to only carry on and / or promote SR&ED. The SR&ED activity may be directly undertaken by, or on behalf of, the corporation or by a B or C entity (as described in section 2.1).
  • The amounts to be expended in Canada on SR&ED must not be less than 90% of the corporation's income for the period.

Legislative references Income Tax Act
Clause 37(1)(a)(ii)(A) Pool of deductible SR&ED expenditures – third-party payments to approved association
Clause 37(1)(a)(ii)(B) Pool of deductible SR&ED expenditures – third-party payments to university, college, research institute, other
Paragraph 149(1)(j) Non-profit corporations for SR&ED

11.5 E entity – Approved organization

As long as the work undertaken falls within the definition of SR&ED as described in the Act, an approved organization, will include the following granting councils:

  • Canadian Institutes of Health Research
  • Natural Sciences and Engineering Research Council
  • Social Sciences and Humanities Research Council

Legislative references Income Tax Act
Clause 37(1)(a)(ii)(E) Pool of deductible SR&ED expenditures – third-party payments to an approved organization
Subsection 248(1) Definition of "SR&ED"

Appendix A – List of approved entities

The information for an application for approved status for SR&ED purposes and the granting of approval is considered to be confidential. Generally, the rules under the Income Tax Act treat taxpayer information as confidential and do not permit the CRA to provide information about a taxpayer to another person. The Act's confidentiality provisions do not allow the public listing of entities that have been granted approved status. However, the Act allows information about a taxpayer to be provided to any other person (a claimant) with the consent of the taxpayer.

Legislative reference Income Tax Act
Section 241 Provision of information

Approved entities that have consented to be publicly identified as of June 4, 2003, are as follows:

  • Alberta Research Council, Edmonton, Alberta
  • Canadian Arthritis Network, Toronto, Ontario
  • Centre des technologies du gaz naturel (Québec) Inc., Montréal, Quebec
  • Centre for Cold Ocean Resources Engineering, Memorial University of Newfoundland, St. John's, Newfoundland and Labrador
  • Children's Hospital of Eastern Ontario (CHEO) Research Institute Trust, Ottawa, Ontario
  • Field Crop Development Centre, Alberta Ministry of Agriculture, Food and Rural Development, Edmonton, Alberta
  • Genesis Research Foundation, Toronto, Ontario
  • *Harvard University, Massachusetts, U.S.A.
  • L'institut de recherche et de développement en agroenvironnement (IRDA; Research and Development Institute for the Agri-Environment), Quebec
  • London Health Sciences Centre Research Inc., London, Ontario
  • McGill University-Montreal Children's Hospital Research Institute, Montréal, Quebec
  • National Research Council of Canada, Ottawa, Ontario
  • Ottawa Health Research Institute, Ottawa, Ontario
  • Research Branch, Agriculture and Agri-Food Canada, Ottawa, Ontario
  • The Arthritis Research Centre Society of Canada, Vancouver, British Columbia
  • The John P. Robarts Research Institute, London, Ontario
  • The Lawson Research Institute, London, Ontario
  • Toronto Hospital Research Institute, Toronto, Ontario
  • *University of North Dakota, North Dakota, U.S.A.

*for purposes of a deduction under paragraph 37(2)(b)

Legislative references Income Tax Act
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Paragraph 37(2)(b) Research outside Canada
Paragraph 149(1)(j) Non-profit corporations for SR&ED
Subsection 241(5) Disclosure to taxpayer or on consent

Appendix B – References

B.1 Legislative references

List of provisions

Income Tax Act                  

 Description

Paragraph 18(9)(a)

Limitation of prepaid expenses

Paragraph 18(9)(d)

Limitation of prepaid expenses excluded for certain third-party payments

Subsection 37(1)

Pool of deductible SR&ED expenditures

Subparagraph 37(1)(a)(i.1)

Pool of deductible SR&ED expenditures - third-party payments to a corporation

Subparagraph 37(1)(a)(ii)

Pool of deductible SR&ED expenditures - third-party payments to certain entities

Clause 37(1)(a)(ii)(A)

Pool of deductible SR&ED expenditures - third-party payments to approved association

Clause 37(1)(a)(ii)(B)

Pool of deductible SR&ED expenditures - third-party payments to university, college, research institute, other

Clause 37(1)(a)(ii)(E)

Pool of deductible SR&ED expenditures - third-party payments to approved organization

Subparagraph 37(1)(a)(iii)

Pool of deductible SR&ED expenditures - third-party payments to exempt corporations

Subsection 37(1.1)

SR&ED related to a business of a related corporation

Paragraph 37(2)(b)

Research outside Canada

Subsection 37(7)

Definition of "approved"

Paragraph 37(8)(b)

SR&ED expenditures related to a business, extended

Paragraph 37(8)(c)

SR&ED expenditures related to a business, restriction

Paragraph 37(8)(d)

SR&ED expenditures specifically excluded

Former paragraph 37(8)(d)

SR&ED expenditures specifically excluded

Subsection 127(9)

Definition of “qualified expenditure”

Subsection 127(26)

Unpaid amounts

Paragraph 149(1)(j)

Non-profit corporations for SR&ED

Section 241

Provision of information

Subsection 241(5)

Disclosure to taxpayer or on consent

Subsection 248(1)

Definition of "SR&ED"

Paragraph 251(5)(b)

Control by related groups, options, etc. – by right

Appendix C – Revisions

C.1 Explanation of changes

The following are the explanation of changes to the Third-Party Payment Policy as part of the revision of December 18, 2014.

Section 1.1 has been revised to delete the phrase in the first sentence of the previous version of this policy which mentioned that this policy document was a consolidation of the CRA publications.

Section 1.2 has been revised to add a sentence and link to new section 2.3.

Section 2.3 has been added to reflect the legislative changes resulting from the 2012 federal budget measures with respect to the reduction of the amount of third-party payments that are included in qualified SR&ED expenditures for investment tax credit purposes.

Section 4.3.1 has been added to explain what is revenue from the prosecution of SR&ED. The wording of this section was originally found in now cancelled Interpretation Bulletin 151R5 (Consolidated).

Section 6.2 has been revised to reflect the legislative changes resulting from the 2012 federal budget measures with respect to third-party payments made after December 31, 2013, to certain entities used to acquire a building, a leasehold interest in a building, or to pay an amount in respect of the rental expense.

Section 11.5 has been revised to correct the list of granting councils, to include the Canadian Institutes of Health Research.

Appendix  B.2 ''CRA publications'' has been removed.

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

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