The client with IT background is employed with a tech company. Can he claim research and development expense for a product he is working on as a side business with no revenue yet? He’s thinking of having a Corp next year. Is there any restriction in taxation I’m missing to claim as an expense?
I would be concerned about any confidentiality agreements he might have signed! To claim R & D as an expense there is a form to fill out to have it approved. Sorry can not remember the number! The last time I filled out this form, you had a year to make your claim. I would research R & D on the CRA website. The rules change very often and they have likely changed. it was a number of years ago.
The R&D is a tough claim, you should down load the IT Bulletin and go through it with the client. The form is T661 and the guide is a T4088.
The main question is whether the expenses are deductible or not without revenue. Yes but … The department seems to put up with a couple years of no income. Software development doesn’t normally have a lot of costs - programming tools and such. The time is not claimable as a proprietorship. If the development fails, some do, or if it doesn’t get a lot of sales, make sure there is good support for all of the work. The department may argue that the project is more of a hobby than a business, and disallow any expenses. If the client has done some research into the potential market, how to market, etc then that would be important. Other things that business do are also important - business registration, business cards, business bank account, registered website and so on. Each item by itself is not necessary key in supporting the concept that the expenses were incurred in nature of trade but more of them certain make the argument more persuasive.
Also make sure of exceptional competency and accuracy and completeness and due diligence when getting involved in SR&ED - familiarity with the Penalties provided pursuant to section 162(5.1) [see also (5.2), (5.3)] would cause me to be extremely cautious…
“R&D” as such is not “expenses incurred in the production of income” unless you can evidence them and justify them by the usual business criteria tests for that purpose.