A Physician's SR & ED: A Personal or Corporate Activity?

Individuals who carry on their business activities through a corporation sometimes make mistakes and sign documents for the business in their personal name rather than on behalf of the corporation. This can raise questions as to whether it is the individual or the corporation that should report the income and claim the associated deductions and credits. In Andre Lamy Medicine Professional Corporation (2020 TCC 61; informal procedure), the TCC decided that this defect in the paperwork should not prevent the corporation from claiming the scientific research and experimental development (SR & ED) deduction and related investment tax credits.

The case involved a physician carrying on his medical practice through a medical professional corporation (MPC). As part of that practice, the physician was involved in SR & ED work funded by an outside party. These activities, which involved four separate projects, occupied more than 50 percent of the physician's time during the taxation years in question. The physician was the only person doing the SR & ED work for the MPC, and he drew a salary from the MPC for these efforts. The contracts with outside parties were signed in the physician's own name, rather than on behalf of the MPC. The MPC claimed the SR & ED deduction and associated credit. The CRA reassessed the MPC, denying the deduction and credit. The MPC then challenged the assessment before the TCC.

At trial, the issue was whether the MPC carried out the SR & ED or whether the physician conducted the research in his personal capacity. The court noted that this issue was a question of fact. Therefore, the court considered all the evidence, which included much more than just the contracts for the four projects.

The court cited several reasons in finding for the appellant (the MPC). First, the research conducted was part of the business carried on by the MPC, and the MPC kept records and prepared detailed representations and information packages regarding that research. Since the physician was the appellant's sole employee, he was the only one able to perform the research in question. Additionally, the physician's employment agreement specified that he must not devote his time to any business other than that of the MPC, and no evidence was brought to the contrary. Moreover, the physician's salary for the research conducted was paid by the MPC directly, despite some of the projects having received third-party funding. As well, the fact that the physician signed the research contracts under his own name did not contradict his testimony that he was signing on behalf of the MPC, since this was the same approach that the physician took in his billings to the Ontario government for his medical services. The court noted that the Crown did not challenge the MPC's position that this income from the government was that of the MPC and not the physician personally.

This case highlights an issue that the CRA notes has caused problems for physicians. In its September 2019 document titled "SR&ED Claims Made by Physicians and Medical Professional Corporations—Information for Claimants," the CRA notes, "In many cases, physicians are required to participate in research as part of their appointment with [a health-care entity such as a university or hospital]. As several parties can collaborate to carry out the medical research, determining the payer and performer can be challenging. Physicians and corporations . . . are distinct legal entities for tax purposes."

Alexandra David
Norton Rose Fulbright Canada LLP, Toronto

Canadian Tax Focus
Volume 10, Number 4, November 2020
©2020, Canadian Tax Foundation