Did you know that having your development work done for you under a fixed price or “hard ceiling” arrangement can be fatal to your prospects for a SR&ED claim? It’s true. This is because the tax authorities look at the “ownership of risk” as one of the critical tests of who is entitled to claim eligible SR&ED work.
Fixed or hard ceiling price arrangements are one of the proven ways to mitigate your own development risks and transfer them to your vendors and suppliers. The problem is that, under the rules for SR&ED, the person who owns the risk normally owns the SR&ED (other factors being equal). However, the mere existence of a fixed or ceiling price is not the definitive test for the ownership of the risk. Where such limits exist, whether they are spelled out in a statement of work or contract terms, there is still a second and crucial test, which is framed in the question: what happens if the price ceiling is reached or the budget spent, and the development is not yet complete?
If your answer is to say that the vendor is “on the hook” to deliver no matter what, and that cost overruns are entirely their problem, then the case is clear: the risk is all theirs, and the case can be made that the SR&ED is theirs also.
On the other hand, if your actual approach is to negotiate fresh terms, or provide additional funds, then the fixed price or hard ceiling does not alter the fact that the risk is effectively shared. The challenge to determine ownership of the SR&ED becomes a more conventional analysis of contractual eligibility, under the guidelines for contract payments (a separate subject from today’s).