Non-arm’s length expenditures for Scientific Research and Experimental Development (SR&ED) refer to expenses made to related parties like parent companies, subsidiaries, or affiliates. To qualify for the SR&ED tax credit in Canada, these expenditures must be reasonable and directly related to SR&ED activities.
The Canada Revenue Agency (CRA) has specific guidelines to assess the reasonableness of these expenditures. Factors like service nature, provider qualifications, market value, and contract terms are considered. If deemed unreasonable, the CRA can disallow part or the entire SR&ED tax credit, especially if bad faith is detected.
Key Points to Remember:
- Related parties must be Canadian residents.
- They must be qualified for SR&ED activities.
- Proper documentation (contracts, invoices, time sheets) is crucial.
- Detailed information about services, provider qualifications, and contract terms should be available for CRA scrutiny.
Example Scenario:
XYZ Ltd., a Canadian company, hires its parent, BABA International, for SR&ED work at $1 million. CRA assesses the fair market value at $800,000, disallowing the excess ($200,000). XYZ Ltd. can claim the tax credit on the remaining $800,000, but the whole credit might be disallowed if bad faith is proven.
Conclusion:
While claiming non-arms length expenditures for SR&ED can reduce tax burdens, it’s complex. Consult a qualified tax advisor for compliance with regulations.
