Tax and Revenue Administration Alberta Corporate Tax Act Information Circular SRED-1

SRED-1 / April 2009

ALBERTA CORPORATE TAX ACT INFORMATION CIRCULAR:
ALBERTA SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED) TAX CREDIT

NOTE: This information circular is intended to explain legislation and provide specific information. Every effort has been made to ensure the contents are accurate. However, if a discrepancy should occur in interpretation between this information circular and governing legislation, the legislation takes precedence.

• Overview of the Alberta SR&ED Tax Credit
• Qualified Corporation
• Alberta SR&ED Tax Credit
• Eligible Expenditures of a Qualified Corporation
• Maximum Expenditure Limit
• Maximum Expenditure Limit – Associated Corporations
• Filing Deadline for Claiming the Alberta SR&ED Tax Credit
• Determination of the Alberta SR&ED Tax Credit
• Recapture of the Alberta SR&ED Tax Credit
• Late-Filed Returns
• Exemption from Filing an Alberta Return
• Deeming of Federal Amounts
• Objections and Appeals
• Reassessment of SR&ED Claims
• Audit of SR&ED Claims
• Alberta SR&ED Anti-Avoidance Provisions

OVERVIEW OF THE ALBERTA SR&ED TAX CREDIT

1. The Alberta Scientific Research and Experimental Development (SR&ED) tax credit program provides a refundable tax credit to corporations with a permanent establishment in Alberta that carry on SR&ED activities in Alberta during a taxation year (a qualified corporation) and incur eligible expenditures after December 31, 2008.  Expenditures by a partnership, trust, or individual are not eligible for this program.  In Alberta legislation, SR&ED has the same meaning as it does in the Income Tax Act (Canada).

QUALIFIED CORPORATION

2. A qualified corporation is a corporation that:
   

• has a permanent establishment in Alberta at any time during a taxation year, and
  
• carries on SR&ED activities in Alberta during that taxation year

but does not include a corporation that is exempt from tax in the taxation year under the Alberta Corporate Tax Act (Act) unless the corporation is a prescribed corporation under the Regulations to the Act.

ALBERTA SR&ED TAX CREDIT

3. A qualified corporation is entitled to an Alberta SR&ED tax credit equal to 10 percent of the lesser of:
   
   
   • the corporation’s eligible expenditures for the taxation year, or
   • the corporation’s maximum expenditure limit for the taxation year.
     
     
4. Refer to paragraphs 10-12 below for the maximum expenditure limit calculation of a qualified corporation.  Where the qualified corporation is associated with one or more qualified corporations see paragraphs 13-17 for the applicable maximum expenditure limit calculation.
   
   
5. A qualified corporation may deduct from its tax payable for the year the lesser of:

• the corporation’s Alberta SR&ED tax credit for the year, or
• the corporation’s tax otherwise payable for the year.

6. The effective date for any amount of the Alberta SR&ED tax credit used to reduce the qualified corporation’s tax payable is the date on which the corporation’s balance of tax is due for the taxation year.
   
   
7. Any remaining Alberta SR&ED tax credit will be applied by the Minister to reduce any tax, interest or penalties owing by the qualified corporation for any other taxation year, or may be applied to any other amount owing by the corporation to the Alberta government.  Where an amount of the Alberta SR&ED tax credit remains, it will be paid to the qualified corporation.  The effective date of the payment or the application of the credit is the date the qualified corporation’s claim for the Alberta SR&ED tax credit was received by Alberta Finance and Enterprise, Tax and Revenue Administration (TRA).
   
   
8. Refund interest associated with the payment or the application of the credit as mentioned in paragraph 7 is calculated starting from the later of the following:
   
   
   • the date the overpayment arose which will be the later of the date the Alberta SR&ED tax credit claim is filed or the date the Alberta Corporate Income Tax Return is filed, or
   • the corporation’s balance due date.
     

ELIGIBLE EXPENDITURES OF A QUALIFIED CORPORATION

9. A qualified corporation’s eligible SR&ED expenditures for Alberta purposes for a taxation year are calculated using the following formula:

            A – B + C + D – E + F.

• Amount A is the costs incurred in Alberta after 2008 that are SR&ED expenditures included in the qualified corporation’s federal qualified expenditure pool at the end of the taxation year for purposes of the federal SR&ED investment tax credit. Amount A is the Alberta portion of the amount on line 559 of the federal form T661.
  
  
• Amount B is the costs, if any, included in the amount determined in amount A for a prescribed proxy amount included in the federal qualified expenditure pool of the qualified corporation.
  
  
• Amount C is the qualified corporation’s Alberta proxy amount, if any, for the taxation year.  The Alberta amount is equal to 65 percent of the salaries and wages incurred in Alberta that were used in the calculation of the federal prescribed proxy amount.  There will be an Amount C only if there is a prescribed proxy amount included in the federal qualified expenditure pool.
  
  
• Amount D is the amount of any Alberta SR&ED tax credit that reduced the federal qualified expenditures of the qualified corporation in the taxation year.
  
  
• Amount E is the federal investment tax credit (ITC) received by the qualified corporation in the immediately preceding taxation year that can reasonably be considered to relate to amounts included in amount A above in any taxation year.
  

Amount E can be calculated as follows:

• Amount F is the amount of any repayment of government assistance (other than the Alberta SR&ED tax credit) or contract payment in the taxation year that can reasonably be considered to relate to amounts included in Amount A above in the taxation year or any prior taxation year.

MAXIMUM EXPENDITURE LIMIT

10. A qualified corporation has a $4 million maximum expenditure limit for any taxation year that begins after December 31, 2008, if its taxation year is 365 days (or 366 days if the taxation year includes February 29).
    
    
11. If a qualified corporation’s taxation year that begins after December 31, 2008 is less than 365 days (or 366 days if it includes February 29), the $4 million maximum expenditure limit is the portion that the number of days in the taxation year is of 365 days (or 366 days if it includes February 29).
    
    
12. If the taxation year of qualified corporation straddles January 1, 2009, the maximum expenditure limit is the portion of $4 million that the number of days in the taxation year in 2009 is of 365.

MAXIMUM EXPENDITURE LIMIT – ASSOCIATED CORPORATIONS

13. Associated qualified corporations must share the $4 million maximum expenditure limit.  For purposes of the Alberta SR&ED tax credit only corporations claiming the Alberta SR&ED tax credit in the taxation year ending in the same calendar year are associated for purposes of the Alberta SR&ED tax credit.
    
    
14. The maximum expenditure limit allocated to an associated corporation cannot exceed the proportion of $4 million that the number of days in the corporation’s taxation year is to 365, or 366 if the taxation year includes February 29.
    
    
15. If an associated corporation has a taxation year that straddles January 1, 2009, the maximum expenditure limit cannot exceed the proportion of $4 million that the number of days in the taxation year in 2009 is of 365.
    
    
16. Where two or more associated qualified corporations file an agreement in prescribed form allocating the maximum expenditure limit among them, the Minister will allocate the maximum expenditure limit according to the agreement, if the agreement is among all the associated qualified corporations, and the maximum expenditure limit is the lesser of:
    • $4 million or
    • the proportion of $4 million that the number of days in the taxation year of the qualified corporation with the longest taxation year bears to 365, or 366 if the taxation year includes February 29.

Where the taxation year of one of the associated corporations straddles January 1, 2009, the allocation of the maximum expenditure limit is based on the proportion of $4 million that the corporation which has the largest number of days in its 2009 taxation year bears to 365.

17. If two or more qualified corporations are associated for purposes of the Alberta SR&ED tax credit and do not file an agreement with the Minister within 60 days after being notified by the Minister that an agreement is required, the Minister will allocate the maximum expenditure limit to one or more of the corporations.

FILING DEADLINE FOR CLAIMING THE ALBERTA SR&ED TAX CREDIT

18. A corporation is not entitled to an Alberta SR&ED tax credit unless it has filed its claim for the Alberta SR&ED tax credit on or before the day that is 18 months from the corporation’s taxation year end.
    
    
19. No new eligible expenditures are to be added to an Alberta SR&ED tax credit claim after the deadline for filing the claim

DETERMINATION OF THE ALBERTA SR&ED TAX CREDIT

20. TRA will determine the amount of a qualified corporation’s Alberta SR&ED tax credit after the later of:
    
    • the date TRA receives the corporation’s SR&ED tax credit claim in prescribed form, and
    • the earlier of:
      
      
      • the date TRA receives confirmation from the Canada Revenue Agency (CRA) the amount of qualified SR&ED expenditures for federal investment tax credit purposes for the year, or
      • the date TRA receives notice of the amount of qualified SR&ED expenditures for federal investment tax credit purposes for the taxation year that have been accepted by CRA.

Confirmation will generally be received directly from the CRA, but the corporation may also provide TRA with a copy of the relevant federal Notice of Assessment and all supporting documentation.

RECAPTURE OF THE ALBERTA SR&ED TAX CREDIT

21. A qualified corporation must report the recapture of Alberta SR&ED tax credit when a property that has received the tax credit is sold or converted to commercial use.  The recapture is calculated under the following circumstances:
    
    
    • the property was acquired by the corporation and the property’s cost was included in its eligible expenditures after December 31, 2008.  The recapture calculation is discussed in paragraph 22 as Situation 1;
      
      
    • the property was acquired by the corporation under an agreement to transfer qualified expenditures to a transferee corporation and the property’s cost was included in its eligible expenditures after December 31, 2008.  The recapture calculation is discussed in paragraph 23 as Situation 2; or
      
      
    • the property was acquired by the corporation from an original user in a non-arm’s length transaction and the property’s cost was included in the original user’s eligible expenditures after December 31, 2008.  The recapture calculation is discussed in paragraph 24 as Situation 3.
      
      
22. Situation 1

A qualified corporation that has acquired a property after December 31, 2008 from a person or a partnership and the cost or a portion of the cost of the property was an amount:

• included in the eligible expenditures of the corporation at the end of any year that ends after December 31, 2008, or
  
  
• included in the eligible expenditures of the corporation at the end of any year that ends after December 31, 2008, even if the cost of the property was unpaid after 180 days from the end of the taxation year
  

and within 20 years after December 31, 2008:

• the corporation converts the property to commercial use,
• the corporation disposes of the property without having previously converted the property to commercial use, or
• the corporation disposes of or converts to commercial use another property which incorporates the property

an amount must be added to the corporation’s tax payable.  The amount to be added is the lesser of:

• the amount that can reasonably be considered to have been received by the corporation as an Alberta SR&ED tax credit, or that would have been received even if the property was unpaid after 180 days from the end of the taxation year.  The amount is calculated using the formula:
  10% x A x B, where:
  
  
  • A is the amount included in the corporation’s eligible expenditures for the cost of the property in the year the property was acquired, and
    
    
  • B is the ratio of the corporation’s maximum expenditure limit for the taxation year in which the property was acquired to the greater of the maximum expenditure limit or eligible expenditures of the corporation for that year,

or

• the product of the ratio in B above and 10 percent of:
  
  
  • where the property, or another property that includes the property, is disposed of to a person that deals at arm’s length with the corporation: 
    
    • the proceeds of disposition of the property or the other property;
    • where the property is first-term shared-use equipment (as defined federally): 25 percent of the proceeds of disposition of the property; and
    • where the property is second-term shared-use equipment (as defined federally): 50 percent of the proceeds of disposition of the property;
      
      
  • where the property, or another property that includes the property, is converted to commercial use or disposed of to a person that does not deal at arm’s length with the corporation:
    
    
    • the fair market value of the property of the other property;
    • where the property is first-term shared-use equipment: 25 percent of the fair market value of the property at the time of its conversion or disposition; and
    • where the property is second-term shared-use equipment: 50 percent of the fair market value of the property at the time of its conversion or disposition.
      
      

Example 1	SR&ED property sold at arm’s length
	Acquired 2009
	Sold in 2010
	Cost	$100,000
	Disposition proceeds	20,000
	2009 eligible expenditures	5,000,000
	2009 maximum expenditure limit	4,000,000
	100,000 x 4,000,000 x 10% = 8,000               5,000,000
	20,000 x 4,000,000 x 10% = 1,600               5,000,000
Amount to be added to the corporation’s tax payable in 2010 is $1,600.
Example 2	SR&ED property not sold at arm’s length
	Acquired 2009
	Sold in 2010
	Cost	$100,000
	Disposition proceeds	20,000
	Fair market value	50,000
	2009 eligible expenditures	5,000,000
	2009 maximum expenditure limit	4,000,000
	100,000 x 4,000,000 x 10% = 8,000               5,000,000
	50,000 x 4,000,000 x 10% = 4,000               5,000,000
Amount to be added to the corporation’s tax payable in 2010 is $4,000.

23. Situation 2
    

A qualified corporation that has acquired a property after December 31, 2008 from a person or a partnership and

• the cost or a portion of the cost of the property was an amount included in the eligible expenditures of the corporation at the end of any year that ends after December 31, 2008,
• all or part of the cost of the property was the subject of an agreement to transfer qualified expenditures to another corporation (the transferee),

and, after December 31, 2008:

• converts the property to commercial use,
• disposes of the property without having previously converted the property to commercial use, or
• disposes of or converts to commercial use another property which incorporates the property

an amount must be added to the corporation’s tax payable.  The amount to be added is the lesser of:

• the amount that can reasonably be considered to have been received as an Alberta SR&ED tax credit for the property by the transferee.  The amount is calculated using the formula:
  10% x A x B where:
  

• Amount A is the amount included in the transferee’s eligible expenditures for the cost of the property in the year the property was acquired, and
• Amount B is the ratio of the transferee’s maximum expenditure limit for the taxation year in which the property was acquired to the greater of the maximum expenditure limit or eligible expenditures of the transferee for that year,

and

• the amount determined by the formula:
  B x (10% x C – D) where:
  
  
  • Amount B is the ratio of the transferee corporation’s maximum expenditure limit for the taxation year in which the property was acquired to the greater of the maximum expenditure limit or eligible expenditures of the transferee for that year,
    
    
  • Amount C is:
    
    
    • where the particular property, or a property that incorporates the particular property, is disposed of to a person who deals at arm’s length with the corporation: the proceeds of disposition of the property, or
    • in any other case, the fair market value of the property at the time of conversion or disposition.
      
      
  • Amount D is the amount, if any, added to the corporation’s tax payable under situation 1 for the particular property.

24. Situation 3

A qualified corporation (the purchaser) that acquired a property, or another property that incorporates the particular property, after December 31, 2008, from an original user of the SR&ED property and the purchaser does not deal at arm’s length with the original user and the cost or a portion of the cost of the property was an amount included in the eligible expenditures of the original user at the end of any year that ends after December 31, 2008, then an amount must be reported as recapture when the property is sold by the purchaser and added to the purchaser’s tax payable for the year.  The amount to be reported is the lesser of:
10% x A x B where:

• A is the amount included in the original user’s eligible expenditures for the cost of the property in the year the property was acquired, and
  
  
• B is the ratio of the original user’s maximum expenditure limit for the taxation year in which the property was acquired to the greater of the maximum expenditure limit or eligible expenditures of the original user for that year,

or

• the product of the ratio of the original user’s maximum expenditure limit for the taxation year in which the property was acquired to the greater of the maximum expenditure limit or eligible expenditures of the original user for that year and 10 per cent of:
  • if the property or other property is disposed of to a person who deals at arm’s length with the purchaser, the proceeds of disposition of the property, and
  • in any other case, the fair market value of the property or the other property at the time of conversion or disposition.
    
    

25. When an SR&ED property, or a property that incorporates the SR&ED property, ceases to be located in Alberta the property or the other property is deemed to have been disposed of at arm’s length by the corporation and the proceeds of disposition are deemed to be at fair market value.
    
    
26. If the property subject to recapture was included in eligible expenditures in more than one year, a calculation of the amount of 10% x A x B on a property must be made for each year.  The amount that can reasonably be considered to have been included in a corporation’s Alberta SR&ED tax credit is the aggregate of the amounts so calculated for each year.

LATE-FILED RETURNS

27. A corporation whose return is late-filed is subject to a late-filing penalty equal to the total of the sum of 5 per cent of the net amount of:
    • the tax unpaid when the return was required to be filed,

less:

• the Alberta SR&ED tax credit to which the corporation is entitled for the year,

and the product obtained when 1 per cent of the net amount above is multiplied by the number of complete months, not exceeding 12, in the period between the date the return was required to be filed and the date the return was filed or an assessment was issued.

EXEMPTION FROM FILING AN ALBERTA RETURN

28. A corporation claiming an Alberta SR&ED tax credit must file an Alberta corporate tax return with TRA, even if the corporation would otherwise be exempt from filing an Alberta return.

DEEMING OF FEDERAL AMOUNTS

29. Where a qualified corporation makes a claim for an Alberta SR&ED tax credit, in determining the Alberta eligible expenditures for a year, the amount of the federal expenditures is deemed to be the amount included in the federal expenditure pool at the end of the taxation year.  As a result, a qualified corporation is bound by any federal determination of amounts included or excluded from the federal expenditure pool.
    
    
30. A qualified corporation must use the federal dispute resolution process to challenge the inclusion or exclusion of amounts in the federal expenditure pool.  Alberta will accept the ultimate federal resolution of any dispute.

OBJECTIONS AND APPEALS

31. Except as noted in the next paragraph, qualified corporations can object provincially to the calculation of the Alberta SR&ED tax credit.  Issues on which an Alberta objection can be filed include whether expenditures are incurred in Alberta after December 31, 2008, how the association rules apply for calculating the maximum expenditure limit and the amount of recapture for Alberta purposes.
    
    
32. Whether an SR&ED expenditure is a qualified expenditure for Alberta purposes rests solely with the federal assessment of the federal expenditure pool.  A qualified corporation is not able to use the provincial objection and appeal process to object or appeal the eligibility of any amount not included in the federal expenditure pool.

REASSESSMENTS OF SR&ED CLAIMS

33. When CRA has reassessed the corporation’s federal SR&ED claim TRA will generally be notified of the results of the federal reassessment.  TRA may contact the corporation to determine whether the federal adjustment affects the Alberta SR&ED claim.  If a corporation does not provide information in a timely manner TRA may reassess the Alberta SR&ED claim on the basis that the federal adjustments affected the Alberta SR&ED claim.
    
    If a corporation files information with TRA on the federal reassessment of its SR&ED claim which affects the Alberta SR&ED tax credit, TRA may reassess the Alberta SR&ED tax credit not more than 12 months after the corporation files the information with TRA.

AUDIT OF SR&ED CLAIMS

34. Claims for the Alberta SR&ED tax credit are subject to a TRA audit.  An audit will include determining expenditures incurred in Alberta, the amount of recapture and the application of association rules for calculating the maximum expenditure limit.
    
    
35. TRA relies on CRA’s determination of eligibility of expenditures for an SR & ED activity.

 ALBERTA SR&ED ANTI-AVOIDANCE PROVISIONS

36. If the Minister is satisfied that the separate existence of two or more qualified corporations is mainly to increase the amount of the Alberta SR&ED tax credit, the Minister may deem the corporations to be associated with each other for the purposes of claiming the Alberta SR&ED tax credit.
    
    
37. If the Minister is satisfied that a qualified corporation has at any time entered into one or more sales, exchanges, declarations of trust or other transactions that:
    
    
    • lack any substantial business purpose other than to increase the Alberta SR&ED tax credit for the corporation or any other corporation, or
    • artificially increase the Alberta SR&ED tax credit that may be claimed by the corporation or any other qualified corporation

the Minister may direct that all of the corporations are deemed to be associated for the purposes of the Alberta SR&ED tax credit.

38. Where a direction has been made by the Minister for a taxation year, the direction does not apply to any previous taxation year of the qualified corporation.  If the Minister’s direction is revoked it does not apply to the taxation year of the qualified corporation to which the revocation relates or any subsequent taxation year of the qualified corporation.
    
    
39. If at any time after December 31, 2008 control of a qualified corporation is acquired by a person and the Minister is satisfied that, as a result of the acquisition of control, the Alberta SR&ED tax credit entitled to by the corporation, or a group of corporations with which it is associated in a calendar year, is increased, the Minister may determine the amount of the Alberta SR&ED tax credit to which the particular corporation, or any of the associated corporations, is entitled.
    
    
40. If at any time after December 31, 2008 a qualified corporation (the particular corporation), as a result of an amalgamation or otherwise, has:
    
    
    • a taxation year that ends before the time it would normally end, or
    • has two or more taxation years ending in the same calendar year

the Minister may determine the amount of the Alberta SR&ED tax credit to which:

• the particular qualified corporation,
• any successor qualified corporation that results from the amalgamation of the particular corporation with another corporation, or
• any qualified corporation associated in the calendar year with the particular qualified corporation,
  

is entitled.