Income Tax Act s. 37(1.4), (1.5) and (2): SR&ED Work Outside Canada

SR&ED incentives are aimed at work carried on in Canada, but subsections 37(1.4) and (1.5) allow a limited amount of foreign work: salary of Canadian-resident employees performing SR&ED outside Canada can be claimed where the work directly supports the Canadian project, up to 10% of the year’s Canadian SR&ED salary base. Separately, subsection 37(2) permits a deduction (but no investment tax credit) for current expenditures on SR&ED carried on outside Canada.

Text of the Provision

37(1.4) For the purposes of this section, section 127 and Part XXIX of the Income Tax Regulations, the amount of a taxpayer’s expenditure for a taxation year determined under subsection (1.5) is deemed to be made in the taxation year in respect of scientific research and experimental development carried on in Canada by the taxpayer.

37(1.5) The amount of a taxpayer’s expenditure for a taxation year determined under this subsection is the lesser of

(a) the amount that is the total of all expenditures each of which is an expenditure made by the taxpayer, in the taxation year and after February 25, 2008, in respect of an expense incurred in the taxation year for salary or wages paid to the taxpayer’s employee who was resident in Canada at the time the expense was incurred in respect of scientific research and experimental development,

(i) that was carried on outside Canada,

(ii) that was directly undertaken by the taxpayer,

(iii) that related to a business of the taxpayer, and

(iv) that was solely in support of scientific research and experimental development carried on in Canada by the taxpayer, and

(b) the amount that is 10 per cent of the total of all expenditures, made by the taxpayer in the year, each of which would, if this Act were read without reference to subsection (1.4), be an expenditure made in respect of an expense incurred in the year for salary or wages paid to an employee in respect of scientific research and experimental development that was carried on in Canada, that was directly undertaken by the taxpayer and that related to a business of the taxpayer.

37(2) In computing the income of a taxpayer for a taxation year from a business of the taxpayer, there may be deducted expenditures of a current nature made by the taxpayer in the year

(a) on scientific research and experimental development carried on outside Canada, directly undertaken by or on behalf of the taxpayer, and related to the business (except to the extent that subsection (1.4) deems the expenditures to have been made in Canada); or

(b) by payments to an approved association, university, college, research institute or other similar institution to be used for scientific research and experimental development carried on outside Canada related to the business provided that the taxpayer is entitled to exploit the results of that scientific research and experimental development.

Source: Income Tax Act (Canada), subsections 37(1.4), (1.5) and (2), as consolidated May 14, 2010. Archived excerpt; subsequent amendments are not reflected. For the current text see the Income Tax Act at Justice Laws.