Is non-resident SR&ED eligibility possible? Yes, companies owned by non-residents, operating in Canada, properly registered with a CRA BN (business number), can receive SR&ED tax credits.
The catch is that these companies qualify for much lower SR&ED credit percentages than a similar private company owned by Canadians. Foreign- owned companies qualify for federal ITCs (Investment Tax Credits) at a 15% rate on qualifying expenses. These foreign-owned companies also qualify for an Ontario tax credit called ORDTC which is 3.5% of eligible expenses. Canadian owned private companies (called CCPCs) qualify for much more generous tax credit percentages. CCPCs receive 35% ITCs from the feds and two Ontario SR&ED credits, OITCs at an 8% rate and ORDTCs at a 3.5% rate. If you do the arithmetic, you can see that Canadian-owned firms qualify for SRED credit percentages which total over 2.5 times those available to foreign-owned private companies. The total percentages are 18.5% credits vs 46.5% credits for foreign vs domestic companies respectively.
Clearly, it is advantageous for private companies, which are eligible for SR&ED, to structure their ownership in such a way that they are designated as a CCPC.
A CCPC is a private corporation which is controlled by Canadian residents. A corporation will not qualify as a CCPC if it is controlled directly or indirectly by a public corporation or non-residents, or a combination of the two.
Let’s break this requirement down. A CCPC must be controlled 50.1% or more by Canadian residents. These Canadian residents can be individuals (Canadian residents with a valid SIN card) and/or other CCPCs. Determining control can be complex when there are nested corporations involved. Control is tracked by a specialized T2 form called the Schedule 50. If you have a complex ownership situation, you want to get a lawyer and or an accountant involved who is well experienced in this area. If the CRA determines that you have been mis-claiming SR&ED as a CCPC, they will go back to prior years and claw back excess credits you have received. This can involve large sums of money they must be repaid based on the 2.5 times domestic vs foreign SRED credit differential.
Here’s a couple straightforward examples. A company operating in Canada owned in equal shares by 4 Canadians and 3 Americans will qualify as a CCPC for the preferential large SR&ED percentages on qualifying expenses. A company operating in Canada owned by 4 Americans will qualify for SR&ED credits but only at the lower foreign-owned percentages.
I will mention here for completeness that publicly owned companies are lumped in with foreign-owned companies to qualify for the lower SR&ED credit rates in Canada.
There are two more big advantages of CCPC’s claiming SR&ED vs foreign-owned firms. First and most importantly, your federal ITC credits and the Ontario OITC credits come to you as refundable credits, ie cash. The foreign-owned company gets non-refundable credits, which can only be turned into cash when applied against an outstanding tax balance owing. That is a big advantage to CCPCs, especially for start-ups and companies with limited or variable profitability. Second, CCPC SR&ED claims are processed on an accelerated schedule, within what is known as a 60-day service standard. Foreign-owned and public company SR&ED claims can take up to 365 days to process.
Call G6 Consulting to get all the answers to your questions about non-resident SR&ED eligibility.