Income Tax Act s. 127(25): Deemed Contract Payment

Subsection 127(25) is an anti-avoidance rule. Amounts a claimant receives as “contract payments” for SR&ED performed on someone else’s behalf reduce the claimant’s qualified expenditures, so there is an incentive to route funding through intermediaries to avoid that treatment. Where one of the main purposes of such an arrangement is to keep an amount from being a contract payment, this provision deems it to be one anyway.

Text of the Provision

127(25) Where

(a) a person or partnership (referred to in this subsection as the “first person”) deals at arm’s length with another person or partnership (referred to in this subsection as the “second person”),

(b) there is an arrangement under which an amount is paid or payable by the first person to a person or partnership (other than the second person) and a particular amount is received or receivable in respect of scientific research and experimental development by the second person from a person or partnership that is not a taxable supplier in respect of the particular amount, and

(c) one of the main purposes of the arrangement can reasonably be considered to be to cause the amount received or receivable by the second person not to be a contract payment,

the amount received or receivable by the second person is deemed to be a contract payment in respect of scientific research and experimental development.

Source: Income Tax Act (Canada), subsection 127(25), as consolidated May 14, 2010. Archived excerpt; subsequent amendments are not reflected. For the current text see the Income Tax Act at Justice Laws.