GST/HST and SR&ED for a Cross-Border Software Company
Helio Fleet Analytics Inc. (HFA) is an Ontario CCPC that sells a cloud-based fleet-routing platform. HFA's servers are in the United States, but its developers and support staff work in Ontario. In 2024 HFA billed Canadian customers $300,000 plus HST and US customers US$700,000. HFA paid $80,000 of Canadian marketing and office costs with HST, $50,000 for US cloud hosting, and $400,000 in Ontario salaries. HFA also spent $120,000 on a project to improve route optimization. The work involved a systematic search for a new algorithm, but $40,000 of it was routine updates and user-interface changes. HFA used a US contractor for $30,000 of coding. HFA has never claimed SR&ED. The owner asks whether the US sales are zero-rated, whether HFA can recover all input tax credits, and whether the $120,000 is SR&ED.
1. Determine the GST/HST treatment of HFA's Canadian and US sales and whether the Canadian expenses generate input tax credits.
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HFA is making taxable supplies of SaaS. For the Canadian customers, HFA charges 13% Ontario HST if the place of supply is Ontario. For the US customers, the supply is generally zero-rated as an export of services if the customer is not a resident of Canada and the service is not consumed in Canada. HFA should confirm the US customers' business addresses and keep evidence that the service is for their business outside Canada. The location of HFA's servers in the US supports the export characterization, but the test is the place of supply, not the server location.
HFA can claim input tax credits for HST paid on Canadian marketing and office costs to the extent they are used in its commercial activity. Because HFA makes taxable supplies, including zero-rated exports, those expenses should generally be fully creditable. The US cloud hosting invoice likely does not include Canadian HST, so there is no ITC to claim; HFA should not self-assess HST simply because the hosting is in the US unless the reverse-charge rules apply, which they generally do not for a Canadian business receiving a service outside Canada. If HFA uses any expenses partly for exempt supplies, it must apportion, but the facts show only taxable supplies.
2. Assess whether the $120,000 project qualifies as SR&ED. Address the routine work, the US contractor, and the documentation and filing requirements.
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SR&ED requires a systematic investigation or search, a technological uncertainty that cannot be resolved using standard practice, a technological advancement, qualified personnel, and documentation. The project to improve route optimization may qualify if HFA can show that it sought a new algorithm to overcome a genuine technological uncertainty and that the work advanced the capability beyond routine development. The $40,000 of routine updates and user-interface changes does not qualify because it is routine and not directed at resolving technological uncertainty. The eligible portion is at most $80,000 before excluding the contractor.
The $30,000 paid to the US contractor is generally not eligible because SR&ED contract payments to non-residents are excluded, and work performed outside Canada is not eligible. HFA should remove that amount from the claim. Ontario salaries for the developers may qualify if the work is SR&ED and the salaries are directly related. HFA must file Form T661 and the relevant schedules with its tax return within 18 months of the year-end, and it must support the claim with project documentation, timesheets, hypotheses, experiments, and records of the uncertainty. As a CCPC, HFA may access the enhanced 35% refundable investment tax credit on eligible expenditures up to the expenditure limit, but the claim must be reduced for any government assistance and must be filed on time.