Income Tax Regulations s. 2900(6): Cap on Proxy Overhead Amount

Claimants who elect the proxy method under clause 37(8)(a)(ii)(B) receive a notional overhead amount, the “prescribed proxy amount”, calculated under Regulation 2900(4) as a percentage of directly-engaged SR&ED salaries. Subsection 2900(6) caps that amount: it cannot exceed the business’s total deductions for the year net of certain specified deductions. The cap rarely binds profitable companies but can surprise claimants with little or no deductible expense base.

Text of the Provision

2900(4) For the purposes of the definition “qualified expenditure” in subsection 127(9) of the Act, the prescribed proxy amount of a taxpayer for a taxation year, in respect of a business, in respect of which the taxpayer elects under clause 37(8)(a)(ii)(B) of the Act is 65% of the total of all amounts each of which is that portion of the amount incurred in the year by the taxpayer in respect of salary or wages of an employee of the taxpayer who is directly engaged in scientific research and experimental development carried on in Canada that can reasonably be considered to relate to the scientific research and experimental development having regard to the time spent by the employee on the scientific research and experimental development.

2900(5) Subject to subsections (6) to (8), where in subsection (4) the portion of an expenditure is all or substantially all of the expenditure, that portion shall be replaced by the amount of the expenditure.

2900(6) The amount determined under subsection (4) as the prescribed proxy amount of a taxpayer for a taxation year in respect of a business shall not exceed the amount, if any, by which

(a) the total of all amounts deducted in computing the taxpayer’s income for the year from the business,

exceeds the total of all amounts each of which is

(b) an amount deducted in computing the income of the taxpayer for the year from the business under any of sections 20, 24, 26, 30, 32, 37, 66 to 66.8 and 104 of the Act, or

(c) an amount incurred by the taxpayer in the year in respect of any outlay or expense made or incurred for the use of, or the right to use, a building other than a special-purpose building.

Source: Income Tax Regulations (C.R.C., c. 945), subsections 2900(4)–(6), as consolidated May 18, 2010. Archived excerpt; subsequent amendments (including later reductions to the proxy rate) are not reflected. For the current text see the Income Tax Regulations at Justice Laws.