A SIMPLIFIED GUIDE
Arm’s length contract expenditures for Scientific Research and Experimental Development (SR&ED) in Canada involve expenses paid to unrelated parties, like third-party contractors or consultants. These expenditures are easier to claim compared to non-arms length expenses, as the Canada Revenue Agency (CRA) typically questions them less.
Criteria for Eligibility:
- Qualification: The contractor or consultant must be qualified for SR&ED activities.
- Written Contract: The contract must clearly outline the work scope, deliverables, and payment terms.
- Reasonableness: Payments made must be reasonable in the given circumstances.
If the CRA deems an arm’s length contract expenditure reasonable, the full amount can be claimed as a qualified SR&ED expenditure. This deduction reduces taxes by the entire expenditure amount multiplied by the applicable SR&ED tax credit rate.
- Residency: Contractors or consultants must be Canadian residents or non-residents operating in Canada.
- Documentation: Proper records, including contracts, invoices, and time sheets, are essential.
- Detailed Information: Be ready to provide specifics to the CRA about the work done, contractor qualifications, and payment justifications.
Claiming SR&ED through arm’s length contract expenditures is relatively simple. Ensure you maintain all required documents and be prepared to provide detailed information to the CRA regarding the work and payments made.