Canada: SR&ED In The Real Estate And Construction Industry

Last Updated: July 1 2014
Article by Paul Boucher and David Douglas

The real estate and construction industry is currently facing unprecedented challenges. Economic and financial uncertainty is relentless. Regulatory hurdles continue to expand and drive additional costs, particularly as they relate to the environmental attributes of real estate and construction projects.

Customers are also demanding more from technological innovation in terms of originality, value and environmental design — both in the construction process and final product. As a developer, builder, contractor, investor, property manager or supplier, your challenges and opportunities in the industry have never been greater. Incentives in support of innovation in this sector are readily available but they are increasingly focused, competitive and time sensitive. Awareness and readiness are essential.

The Canadian Scientific Research & Experimental Development (SR&ED) program offers some of the most generous incentives in the world. A white lab coat generally comes to mind over a hard hat and steel toes, but SR&ED activities go beyond those taking place in a traditional research lab. Real estate companies are not typically perceived as being in the "science and technology" business, but they are often paying for and taking the financial risks in respect to engineering development work. Significant eligible project incentives are often missed because it is not easy to recognize who is entitled to the claim. In other industries, such as manufacturing and IT, the development risks are spread more evenly throughout the supply chain.

The SR&ED program can be used to help the real estate and construction industry with support for innovations ranging from design and development of equipment and structures to building materials and new energy sources. Some areas that may apply include:

  • analysis of structural designs related to dynamic structures (retractable roofs, solar energy collection positioning systems)
  • design and development of construction equipment, tools and temporary construction structures
  • investigations related to the development of new — or the improvement of existing — construction and building materials (metals/ alloys, glass, plastics, ceramics, concrete/ cement, insulation)
  • investigations related to the development of new — or the improvement of existing — construction techniques to improve finish quality, durability and efficiency, soil remediation and to achieve environmental certification under programs such as LEED

By way of example, engineering firms hired by real estate and construction firms often undertake SR&ED eligible projects yet are unable to make a claim for their technological advancements. This is because they are paid for their efforts and are not undertaking any financial risk. The real estate and construction firms paying for the engineering work are taking such risk but are often unaware of the potential for making a claim themselves. Consequently, significant leakage of potential SR&ED incentives results from the way contracts are formed along the real estate development supply chain.

Contract payment rules in the SR&ED regime are designed to prevent two Canadian companies from claiming incentives on the same project. These rules are among the more complex in the program. Four criteria are examined in order to determine who is allowed to make the SR&ED claim when one Canadian company pays another to perform its SR&ED eligible work:

1. Contractor performance requirements

Does the contract state that the contractor was required to perform specific SR&ED work? For example, "The contractor shall design, provide detailed engineering and verify the performance in accordance with the specifications set out in..." This wording indicates that the contractor had to perform SR&ED work on behalf of the company, meaning that the amount paid is a contract payment and therefore claimable by the payer – usually the developer or general contractor. This is often overlooked by the real estate developers.

2. Pricing vs. risks assumed

Is there a flat fee or ceiling price under the contract? Would the contractor have been paid if the work did not initially meet the specifications set out under the contract? If yes, it may indicate that the financial risks were taken on by the payer – again typically the developer or general contractor and as such they are entitled to the claim.

3. Intellectual property

If the rights to the intellectual property (IP) of the SR&ED work belong to the payer, this may indicate that the contractor was required to perform SR&ED on their behalf.

4. Contract for service vs. contract for the sale of goods

A contract for service may indicate that the SR&ED work was being performed on behalf of the payer.

Changes to the SR&ED program introduced in the March 29, 2012 Federal budget are beginning to take effect. This includes:

  • elimination of capital expenditures, including the expenditures for the right to use capital property, incurred in 2014 and subsequent years
  • reduction of the overhead proxy amount from 65% in 2012, to 60% in 2013, and 55% after January 1, 2014
  • eligible contract payments limited to 80% of the expenditures paid to eligible arm's length contractors beginning January 1, 2013
  • general investment tax credit rate reduction from 20% to 15% after January 1, 2014

The good news in the budget is that the enhanced rate of 35% remains unchanged for expenditures under the annual expenditure limit for Canadian-controlled private corporations.

The changes to the SR&ED program were required to finance more direct funding programs outside of the income tax system. The government's intention to improve direct funding to bolster Canadian innovation was reinforced in the recently released 2014 Federal budget. $1.5 billion in funding over the next decade was announced, most of it supporting research at post-secondary institutions. These programs are currently arising with increasing frequency. The programs are competitive, have a specific dollar amount of funding available and close when the money is gone. It is advised to watch carefully, be prepared, and act fast!

The following are several examples of direct funding initiatives potentially available to the real estate and construction sector.

Sustainability and Energy

1. High Performance New Construction Program

2. Retrofit Incentive Program

3. Save On Energy Audit Funding

4. No-tax on gasoline used in Unlicensed Business Equipment

Research and Development

1. New Directions Research Program

2. OMAFRA and University of Guelph Research Agreement

3. Industrial Research Assistance Program

Workforce/Labour

1. Canada Summer Jobs

2. Summer Jobs Service (Ontario)

3. Youth Employment Strategy (YES)

4. Apprenticeship Training Tax Credit

Productivity and Competitiveness

1. Export Market Access: A Global Expansion Program

The National Research Council's concierge service provides information and assistance to help small and medium-sized businesses access a myriad of federal and provincial innovation programs. This agency is often a good place to start. Seeking the assistance of a qualified and experienced professional service provider is another great source of advice for program eligibility and application guidelines.

Despite redirecting a portion of the available resources to direct funding initiatives, the SR&ED program continues to be the single largest federal funding source and one of the most generous incentive programs in the world. There is no question that Canadian real estate and construction companies are and will continue to deliver on innovation and contribute to the future competitiveness and prosperity of the Canadian economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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