Could you pay two brothers who are directors and 50% shareholders wages only for their SRED work and not for their managerial work, so that the full amount of the wages could be used for calculating SRED qualified expenditures? Yes, of course.
The appellant’s accountant told the brothers that they could get credit for wages paid for SRED work but not other work. So they only paid themselves for the SRED work. For the rest of their operational roles, they took draws during the year and cleared those at the end of the year through offsetting dividends.
CRA accepted the number of hours claimed as SRED work and it accepted the other amounts (nearly $300,000) claimed to be SRED expenses. The only issue was one of fact: was the entire wage each brother got solely for SRED? The court accepted the evidence that it was.
One interesting feature was that the total paid to the brothers was based on their combined hours of work on SRED (which was agreed by the CRA) multiplied by a market rate of $30 per hour. But the actual apportionment between the brothers was not made using that same rate. I.e., one brother got more than the hourly rate times his SRED hours would give. But the Court did not think that made a difference. [30]
The Crown also objected on the basis that the effect was that the brothers were not paid any wage for their managerial activities. But D’Arcy J did not care about that either, treating it as “their choice [that] did not require a formal agreement.” [33]
I am not sure why this case, which involved a dispute only of, say about $25,000 of wages, was a General Procedure appeal. Perhaps it was just that the counsel for the appellant was unsure that the IP rules could apply? The total SRED expenditures were about $300,000, including $38,000 of wages. But even if one takes 55% of 75% of the disputed wages [Reg. ss. 2900(4) and (7)] and treats that as an overhead expense that would be a qualified expenditure, one doesn’t seem to get to $25,000 of federal tax in dispute, such that the GP rules must apply. The consequence, though, was that D’Arcy J invited costs submissions. The costs award could, perhaps, exceed the amount at stake.