Employees performing Scientific Research and Experimental Development (SR&ED) outside Canada

As a result of the 2008 Federal Budget, claimants can earn SR&ED investment tax credits (ITC) on permissible salary or wages for SR&ED work performed outside Canada after February 25, 2008.  The SR&ED work performed outside Canada must be directly undertaken by the employees of the claimant, and must form part of the SR&ED performed in Canada by the claimant.  Permissible salary or wages incurred by a taxpayer in a tax year will be limited to 10 percent of the total of salary or wages for SR&ED performed in Canada. 

Calculation of permissible salary or wages for SR&ED work performed outside Canada

To determine what amount can be claimed as permissible salary or wages for SR&ED work performed outside Canada, claimants will first have to calculate Amount A and Amount B (below).

Amount A
Total of salary or wages for SR&ED work performed outside Canada:

• that was incurred after February 25, 2008;
• that was paid to an employee who performed SR&ED work outside Canada, and who was resident in Canada at the time the expense was incurred and was not subject to paying taxes in the foreign country where the SR&ED was performed; and
• for which the SR&ED work was an integral part of the claimant's SR&ED performed in Canada.

Amount B
10% of the total of SR&ED salary or wages for SR&ED performed in Canada.

• For the first tax year that includes February 26, 2008, the 10% limit will be pro-rated based on the number of days in that tax year that are after February 25, 2008, using the following formula:

Number of days in the tax year after February 25, 2008
total number of days in the tax year

The lower of Amount A or Amount B should be included on Form T661, Claim for Scientific Research and Experimental Development (SR&ED) Carried Out in Canada.  For more information please refer to Filing instructions.

Example:

A Canadian company (Canco) is conducting SR&ED in Canada to create a flying toy, called the Toychuk that could withstand "tornado speed" winds.  After testing the Toychuk under simulated conditions in a laboratory in Canada, the company sends one of its full-time SR&ED employees, Gurjot, to a foreign country where tornados are common. Gurjot conducts tests on the Toychuk under real conditions in that foreign country during January 2008.  The company sends another of its full-time SR&ED employees, Bianca, for subsequent tests on the product under real conditions in another foreign country in December 2008.  Bianca and Gurjot are residents of Canada and the salary paid to them by Canco is not subject to income tax in any other country.  Canco's tax year-end is December 31, 2008.  The company has 10 full-time employees carrying on SR&ED in Canada and each of them is paid $96,000 annually.  In 2008, the company paid $960,000 in total salaries to its SR&ED employees.

For the 2008 tax year, Canco can claim $8,000 for salaries paid to employees performing SR&ED outside Canada.

The $8,000 is determined as the lesser of the following two amounts:

Amount A: $8,000 (salary for Bianca for December 2008 = $96,000/12)
This amount does not include Gurjot's salary for January 2008 because it was incurred before February 26, 2008.

Amount B: $79,956 (calculated as ($960,000 - $16,000) x (10% x 310/366))
Since Canco's 2008 tax year includes February 26, 2008, the 10% limit is pro-rated based on the number of days after February 25, 2008, that are in the 2008 tax year.

Filing instructions

Claimants who are using the (07) version of Form T661 can claim permissible salary or wages for SR&ED performed outside Canada by including this amount, together with salary or wages for employees who are directly engaged in SR&ED in Canada, on Form T661 when using the proxy or the traditional methods on:

• line 300 - for other than specified employees; and
• line 305 - for specified employees. 

Please refer to the T4088 Guide to Form T661, for further explanations of "directly engaged in SR&ED," the "proxy method," and the "traditional method."

In addition to these instructions, and until the release of the next revision of Form T661, claimants must separately identify the total of all salary or wages claimed for SR&ED work performed outside Canada on Schedule E of Form T661 as a separate project.  Enter "Outside Canada" in field 210 of Schedule E as the Project Name.  Enter the beginning of the tax year in field 212 and the tax year-end in field 214.  Enter the total salary or wages for SR&ED work performed outside Canada that you have included on lines 300 and 305 of Part 3 of Form T661, in field 216.

The table below shows how, based on the previous example, CanCo would include $8,000 for salary or wages paid to employees performing SR&ED work outside Canada on Schedule E.

 Schedule E – List of all SR&ED projects claimed in the year (attach to Form T661).