The Canada Revenue Agency released a memo clarifying its position on Scientific Research and Experimental Development (SR&ED) claims filed by physicians and medical professional corporations (MPCs). This guidance addresses growing disputes between the CRA and medical professionals claiming SR&ED tax credits.
Why This Memo?
SR&ED claims have long been filed by specialist physicians conducting research alongside clinical practices. However, recent reports indicate many claims — particularly in Ontario and Quebec — face CRA scrutiny and denial. The agency appeared to be systematically challenging these claims through various angles.
Major Issues
Three primary concerns emerged in the CRA's position:
Assistance and Funding Reductions
SR&ED eligible expenditures must be reduced by government assistance, non-government assistance, or any inducement. When research is funded by another entity, the claim amount must be correspondingly reduced.
Contract Payment Restrictions
The program incentivizes net R&D costs. Where a Canadian taxable supplier funds the work, SR&ED claims effectively reduce to zero unless the claimant can demonstrate significant financial risk.
Entity Distinction
A critical dispute centred on whether "a hospital paying for a study done by Dr. John Doe" differs from "the hospital paying for a study done by Dr. John Doe Professional Corp." The CRA maintained these represent distinct arrangements with different tax treatment.
Key Takeaways
1. Government Healthcare Funding as Assistance
Government-funded healthcare entities typically constitute assistance, reducing eligible SR&ED expenditures.
2. Individual Physicians vs. Corporations
The distinction matters significantly. Agreements must explicitly involve the MPC rather than the individual practitioner to support corporate-level SR&ED claims. Individual physicians claiming SR&ED face limitations since they typically lack T4 wage expenses.
3. Documentation Importance
Detailed, current documentation proving research agreements, funding sources, scope, and participant roles remains essential. Contracts should explicitly reference corporate involvement.
Tax Planning Perspective
Individual practitioners operate at non-enhanced 15% investment tax credit rates with non-refundable credits. By contrast, physician corporations — especially Canadian-controlled private corporations — can access enhanced 35% SR&ED investment tax credit rates following the 2019 Federal Budget changes eliminating taxable income thresholds.
Medical professionals and their advisors should review this CRA memo, reassess their claim circumstances, and ensure documentation clearly establishes corporate involvement and the research project's scope.