2010-08-02|Innovation in Canada: ABIL for SR&ED Salary

To the Minister of Finance

To the Minister of National Revenue

To the Minister of Industry

To the Minister of Justice

To the Minister of State for Science and Technology

As instructed by the Prime Minister's Office, I am sending my request to you.
The Tax Court of Canada concluded that the purpose of the Allowable Business Investment Loss (ABIL) deduction is not to help finance Scientific Research and Experimental Development (SR&ED) expenditures as suggested by the Appellant, without any consideration for the status of a non-arm's length Canadian-controlled private corporation (CCPC).

Given the fact that the Government of Canada encourages SR&ED especially by small businesses, I propose a legislative amendment of adding Paragraph 50(1)(c) to the Income Tax Act as follows.

Income Tax Act (R.S.C. 1985)
Debts established to be bad debts and shares of bankrupt corporation

50. (1) For the purposes of this subdivision, where
(a) a debt ..., or
(b) a share ..., or
(c) an amount paid to a non-arm's length Canadian-controlled private corporation (CCPC) to pay a salary for the sole purpose of the SR&ED Tax Incentive Program.

I am a sole owner of a non-arm's length small business which is a Canadian-Controlled Private Corporation (CCPC). I spend more than 90 % of my full-time working hours on Scientific Research and Experimental Development (SR&ED). I am investing my own money into the SR&ED activities to create Intellectual Property for Canada's Knowledge Economy.
I am proud of having filed more than 60 patent applications and developing new products and services for the future of Canada, but the company has not made any profit yet. The harsh reality is that between 98 % and 99 % of patents fail to make money, according to a U.S. university study. This percentage of failure rate is much higher than the legal burden of proof beyond a reasonable doubt of between 70 % and 74 %.
I believe that the company has made valuable contribution to Canadian society through technological advancement. SR&ED is inherently long-term with high-risk due to uncertainties. Business investment into SR&ED activities is lost by definition because there is no immediate pay-back or a short-term profit. Although SR&ED expenses were incurred for the purpose of eventually gaining or producing income, profits are far from guaranteed due to market condition, customer acceptance, etc.
The company issued a T4 Summary and a Sommaire 1, as well as a certificate stating that the investment became a bad debt at the end of the taxation year, in accordance with paragraph 50(1)(a) of the Income Tax Act. For my Personal Income Tax Return, I claimed the Allowable Business Investment Loss (ABIL) on Line 217 as "Bad Debts" because I invested my own money into the company for its SR&ED activities, and I was not able to collect the debt from the company at the end of the year. The denial of ABIL leads to the following utterly absurd situations.
- If my company's SR&ED claim is reduced by CRA's SR&ED auditors for the lack of documentation, for example, then my Personal Income Tax could become greater than the SR&ED Tax Credit because the salary cannot be changed, literally turning an incentive into a penalty. This impossible situation is happening right now as I speak...
- If I incorporate a company every year that does the same SR&ED, but intentionally goes bankrupt at the end of the year in order for me to claim the ABIL in my Personal Income Tax Return, then such artificial scheme will completely satisfy CRA's Personal Income Tax department.
I am extremely desperate because the Tax Court of Canada dismissed my case as a "non-issue" a few weeks ago. My lonely and desperate quest to have the SR&ED salary of a small business recognised for ABIL in the owner's Personal Income Tax, as shown in the attached diagram "Small Business doing SR&ED" for your review.
Thank you very much for your attention.

Income Tax Act (R.S.C. 1985) Debts established to be bad debts and shares of bankrupt corporation
50. (1) For the purposes of this subdivision, where (a) a debt ..., or (b) a share ..., or (c) an amount paid to a non-arm's length Canadian-controlled private corporation (CCPC) to pay a salary for the sole purpose of the SR&ED Tax Incentive Program.

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"Sunatori, Go Simon" <GS.Sunatori@HyperInfo.CA>

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ISBN 978-0-929105-04-8

2024-04-11T01:51:01.000Z