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Information for Agricultural Organizations and Farm Producers on Access to SR&ED Investment Tax Credits
February 6, 2002
Introduction
The Scientific Research and Experimental Development (SR&ED) Program is a Government of Canada program to encourage Canadian businesses of all sizes to do SR&ED that will lead to new or improved technologically advanced products or processes. The program gives claimants investment tax credits (ITCs) by means of cash refunds and/or tax credits to be applied against taxes payable for their expenditures on SR&ED done in Canada.
Until now, farm producers making financial contributions to agricultural organizations by way of check offs, levies, or cash assistance, for SR&ED, have not been able to access the ITCs because of specific legislative provisions governing the program. The Canada Revenue Agency (CRA) has now initiated a process, within the current legislative framework, by which producers may now access ITCs earned on contributions made to agricultural organizations that fund SR&ED.
Current Requirements for Contributions to Qualify
Contributions by producers to agricultural organizations are, for purposes of the program, called third party payments. To qualify under the program, payments must be made to:
- approved associations;
- approved universities, colleges and research institutes, or;
- non-profit SR&ED corporations.
As well,
- the SR&ED must be conducted in Canada;
- the SR&ED must be related to the business of the claimant, and;
- the claimant must have a preferential right to exploit the results of the SR&ED.
Roadblocks to Access
Based on the previously noted requirements, the following two roadblocks have prevented payments made by producers to agricultural organizations from being claimed for ITCs:
- Payments were not made to an "approved" association, university, college, research institute, or a non-profit corporation.
- Producers making the contribution payments did not have the preferential right to exploit the results of the SR&ED.
Overcoming the Roadblocks - Agent-Principal Relationship
The current legislation allows only contributors, who in this case are farm producers, to claim ITCs on SR&ED. In order to qualify the producers for the ITCs under the legislation, 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 actual performers of the SR&ED.
Meeting the Requirements of an Agent-Principal Relationship
In order to satisfy the agent-principal characterization in matters relating to SR&ED, agricultural organizations and producers have to satisfy the following requirements:
a - 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.
b - A committee comprised of agricultural organization executives and representative farm 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. In cases where the present Board of Directors is already structured to fulfill these requirements, the establishment of a second committee is not necessary.
c - 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.
Responsibilities of the Farm Producers
a. - Producers must have contributed monies to agricultural organizations through check offs or cash payments who, in turn, make payments to approved associations, universities, colleges, research institutes or non-profit SR&ED corporations to conduct SR&ED in Canada.
b. - The SR&ED has to be related to the producer's business.
c. - Producers must have a preferential right to exploit the results of the SR&ED.
d. - Producers, through their membership on a joint agricultural organization/producer committee, must direct which SR&ED projects will be funded in the year.
e. - 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).
f. - Producers must file a T2038(IND) for farm proprietorships or a T2SCH31 for farm corporations.
Note:Until CRA revises the T2038(IND) and T2SCH31 and to assist the tax centres with the identification of the files related to check-offs, please note on the top of the T2038(IND) or T2SCH31, that the claim is related to check-off contributions. Corporate claimants filing T2s are also requested to include with their claim, a letter advising that the claim is related to check-offs or SR&ED contributions to an agricultural organization. This letter should be placed on top of the return. Revisions to the next version of the T2038(IND) and the T2SCH31 will incorporate a box which the claimant will mark to identify the claim as relating to a check-off.
g. - The farm producers must file the T2038(IND) or T2SCH31 relating to the SR&ED ITC claim within 17 and ½ months or 18 months respectively, of the taxation year end in which the check-offs were paid.
h. - The producer must report as income in the subsequent year, all SR&ED ITCs utilized (refunded or applied against taxes payable).
Responsibilities of the Agricultural Organizations
a. - Agricultural organizations must act as agents for contributing producers in all matters relating to SR&ED. This characterization should be reflected in the organization's by-laws or regulations or as a resolution passed at the annual general meeting providing the same authority.
b. - Agricultural organizations must make payments for SR&ED to an approved association, university, college, research institute or a non-profit SR&ED corporation.
c. - Agricultural organizations must ensure that producers have a preferential right to exploit the results of the SR&ED.
d. - 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. (As previously noted, the Board of Directors may fulfill this capacity providing farm producers have representation on the Board).
e. - To assist the farm producers in receiving their tax credit entitlements on a timely basis, agricultural organizations are encouraged to file one T661 each year on behalf of their members within 6 months of their fiscal year end. Failure to file a T661 in any fiscal year will result in the farm producer's entitlement to the tax credit being disallowed for that year. This T661 should be sent directly to the tax centre for your region.
f. - The amount of the SR&ED payments made by the agricultural organization should be included on line 370 of the T661.
g. - Agricultural organizations must maintain the necessary books and records so that CRA can review the contributions received and distributed for SR&ED.
h. - In cases where producers cannot determine the SR&ED contribution, the agricultural organization, where possible, will provide that information.
i. - 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.
j. - The agricultural organizations will be responsible to advise farm producers in which province the SR&ED was performed. To qualify for the provincial SR&ED tax credit in provinces having their own SR&ED tax incentive program, it is a requirement that the SR&ED be performed in that province.
Qs & As
Question 1: How will "contributions in-kind" be treated? Will the value of these costs be eligible for the investment tax credits?
Answer: Contributions-in-kind include costs incurred by farm producers for such things as testing an SR&ED process or product utilizing their time, property, and equipment. Provided that the farm producers can clearly identify these costs as they relate to particular 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 SR&ED. In the case of a proprietorship, no consideration will be given to the time the proprietor producer expends on an SR&ED project.
Question 2: Can a farm producer claim investment tax credits on check-offs or levies that are refunded by agricultural organizations?
Answer: Farm producers can only claim payments that are used by agricultural organizations for SR&ED. If agricultural organizations have refunded payments, farm 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?
Answer: Only contributions for SR&ED performed in Canada qualify for the ITCs.
Question 4: How do farm producers acquire the preferential rights to exploit the results of particular projects?
Answer: Farm producers must have access to the research results before someone else who is not a contributor. The distribution of research results to contributing producers by agricultural organizations should satisfy this requirement.
Question 5: How does the farm producer identify how much money they have contributed to agricultural organizations that was invested in SR&ED?
Answer: Contribution information generally comes from one of two sources. It may come from the farm producer's commodity sales receipt, which may have the "check-off" allocation identified on it, or from the agricultural organization to which the producer has contributed the funds. Farm 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 farm producers know what portion of the total contributions were allocated to SR&ED?
Answer: Each agricultural organization will be responsible for providing farm producers with the percentage of the total contributions allocated to SR&ED for the year.
Question 7: In instances where farm producers contribute to a number of agricultural organizations that invest in SR&ED, does only one T2038(IND) or T2SCH31 need to be filed?
Answer: Yes. Farm producers will have to identify the check offs 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 then be totaled and the ITCs calculated at the appropriate rate.
Question 8: How does the agricultural organization determine if a particular project to be funded would be SR&ED under the program?
Answer: In addition to information publications, including Information Circular 86-4R3, the SR&ED Program provides a service called Preclaim Project Review (PCPR). This optional service provides an "up-front" review and preliminary opinion on the SR&ED work and the related tax credits.
Question 9: What if a provincial agricultural organization distributes the farm producer's monies to a national agricultural organization that, in turn, pays a research institute to do SR&ED? Will the farm producer still qualify to claim the ITCs?
Answer: The farm producer will continue to qualify for the ITCs providing that, at each level, the agricultural organization acts as an agent for the farm producer and providing that all other conditions are met.
Question 10: How will agricultural organizations know if the research institute or university doing the SR&ED is "approved"?
Answer: All Agri-Food and Agriculture Canada (AAFC) research institutes, as well as all Canadian universities, are approved. Any other research institutes or associations should be able to produce a document from the Rulings Directorate of the CRA that identifies them as "approved".
Question 11: Is there an available list of all the "approved" associations and research institutes?
Answer: No. The confidentiality provisions of the Income Tax Act prevent the CRA from providing a list of the "approved" associations and research institutes.
Question 12. Is there a filing deadline for farm producers and agricultural organizations to file the T2038(IND)/T2SCH31 and T661 respectively?
Answer: Farm producers who are proprietorships must file the T2038(IND) relating to the SR&ED ITC claim within 17 and 1/2 months of the taxation year-end in which the check-offs were paid. Corporate farm producers must file the T2SCH31 within 18 months of the taxation year-end in which the check-offs were paid. Agricultural organizations are encouraged to file one T661 each year on behalf of their members within 6 months of their fiscal year end. Failure to file a T661 in any fiscal year will result in the farm producer's entitlement to the tax credit being disallowed for that year.
Question 13: Must I identify in my tax return, why I am claiming ITC's?
Answer: Yes. All claimants must identify on the T2038(IND) or T2SCH31 that they are making a claim related to check-offs. At the top of the T2038(IND) or T2SCH31, the claimant should include a note stating that the claim is related to check-offs or SR&ED contributions to agricultural organizations. For corporate claimants we are further requesting that a letter be attached to the front of their T2 identifying that they are making an SR&ED claim related to check-off contributions. This is to assist the CRA with the proper processing of the returns. Revisions to the next version of the T2038(IND) and the T2SCH31 will incorporate a box which the claimant may mark to identify the claim as relating to a check-off.
Question 14: When will I be able to make my first claim for SR&ED tax credits?
Answer: Farm producer contributions made to agricultural organizations on or subsequent to January 1, 2001 will be eligible, providing that all the aforementioned requirements are in place.
Question 15. How may investment tax credits be used?
Answer: Investment tax credits may be:
- Used to offset federal tax in the year.
- Carried back 3 years or forward 10 years to be applied against federal tax generated in that particular year.
- Paid as a cash refund.
Question 16. Do check-off payments qualify for provincial SR&ED tax credits?
Answer: Yes. But to qualify for the provincial SR&ED tax credit in provinces having their own SR&ED tax incentive program, it is a requirement that the SR&ED be performed in that province. It is, therefore, important that the agricultural organizations advise the farm producers in which provincial jurisdiction the SR&ED was done.
Question 17: Where might I go to get additional information?
Answer: For more information you may visit CRA's Web site at www.cra.gc.ca/sred, contact your local tax services office or call 1-800-959-5525 toll free.
Question 18: What are the investment tax credit rates for individuals, corporations, and large Public corporations filing under the SR&ED Program?
Answer: The rate for individuals and unicorporated businesses is 20%, for Canadian Controlled Private Corporations is 35%, and for large public corporations is 20%.
