1. General principle
Eligible costs are the direct and indirect costs that, in the opinion of the Minister, are reasonably and properly incurred or allocated, to the performance of the project, less any applicable credits. These costs will be determined in accordance with the company's cost accounting system, as accepted by the Minister, and applied consistently over time. The cost accounting system should clearly establish an audit trail that supports all cost claims, in particular, the direct labour costs, as described below, clearly indicating the allocation of each employee's hours on the project.
2. Reasonable costs
A cost is reasonable if, in nature and amount, it does not exceed that which would be incurred by an ordinary prudent person in the conduct of a competitive business.
When determining the reasonableness of a particular cost, consideration must be given to the following:
- whether the cost is of a type generally recognized as normal and necessary for the conduct of the company's business or performance of the project
- the restraints and requirements by such factors as generally accepted sound business practices; arm's-length bargaining; federal, provincial and local laws and regulations; and the terms of the contribution agreement
- the action that prudent business persons would take in the circumstances, considering their responsibilities to the owners of the business, their employees and customers, the Government of Canada, and the public at large
- significant deviations from the established practices of the company that may unjustifiably increase the eligible costs
- the specifications, delivery schedule and quality requirements of the particular project as they affect costs.
In the case of eligible costs incurred with an affiliated person, the amount of the costs incurred will be adjusted as follows:
- The cost of those goods or services must not exceed their fair market value.
- When there is no fair market value for the applicable goods or services, the fair market value of similar goods will be used.
- When there is no similar good, the cost-plus method (see below) will be used to determine the cost.
The cost-plus method determines the total costs plus profit, as follows:
- Using the cost-plus method, total costs are the sum of the applicable direct and indirect costs, as described in sections 4 and 5, below, that were reasonably incurred or allocated in the performance of the statement of work, as determined and measured consistently in accordance with Generally Accepted Accounting Principles.
- Profit is calculated as follows, provided that the profit does not exceed 5 percent of the total costs: profit = total cost x (1.7 x 3-year Canadian Saving Bond rate, as of the date of the execution of the contribution agreement).
3. Methodologies to determine the direct and overhead costs
For claim purposes, companies are to choose one of the following two methodologies for the submission of eligible costs:
- the Canada Revenue Agency's Scientific Research and Experimental Development (SR&ED) Expenditures Claim (Guide to Form T661) costing methodology; or
- the Public Works and Government Services Canada (PWGSC) methodology whereby direct costs are calculated in accordance with the SADI Costs Principles, and indirect costing rates are determined using the applicable PWGSC costing rates negotiated with the company in accordance with PWGSC 1031-2 Contract Cost Principles. For any period for which the PWGSC rate negotiations have not been completed at the time of claim preparation, the previous year's negotiated PWGSC costing rates will be used in the interim. In the event that no previous PWGSC rate exists for the project, an interim overhead rate of 65 percent of direct labour will apply.
4. Direct costs
(applicable only if PWGSC rates are to be used)
There are three categories of direct costs:
- Direct material costs: the cost of materials that can be specifically identified and measured as having been used or to be used for the performance of the project and that are so identified and measured consistently by the company's cost accounting system as accepted by the Minister. These materials may include, in addition to materials purchased solely for the project and processed by the company, or obtained from subcontractors, any other materials issued from the company's general stocks. Materials purchased solely for the project or subcontracts shall be charged to the project at the net laid-down cost to the company, net of any taxes and before any discounts for prompt payment. Materials issued from the company's general stocks shall be charged to the project in accordance with the method as used consistently by the company in pricing material inventories.
- Direct labour costs: that portion of gross wages or salaries incurred for activities that can be specifically identified and measured as having been performed or to be performed on the project and that is so identified and measured consistently by the company's cost accounting system, as accepted by the Minister.
- Other direct costs: those applicable costs, not falling within the categories of direct material or direct labour, but that can be specifically identified and measured as having been incurred or to be incurred in performance of project activities and that are so identified and measured consistently by the company's costing system, as accepted by the Minister.
Direct costs do not include any allocation for profit or any allocation of general and administrative expenses.
5. Indirect costs
(applicable only if PWGSC rates are to be used)
Indirect costs (overhead) are those costs that, though necessarily having been incurred during the period of the performance of the project activities for the conduct of the company's business in general, cannot be identified and measured as directly applicable to the project.
These indirect costs may include, but are not necessarily restricted to, such items as the following:
- indirect materials and supplies (Supplies of similar low-value, high-usage items, the costs of which meet the above definition of direct material costs but for which it is economically expensive to account in the manner prescribed for direct costs, may be deemed to be indirect costs for the purposes of the project.)
- indirect labour
- fringe benefits (the company's contribution only)
- service expenses: expenses of a general nature, such as power, heat, light, operation and maintenance of general assets and facilities
- fixed and period charges: recurring charges such as property taxes, rentals and reasonable provision for depreciation
- general and administrative expenses: including remuneration of executive and corporate officers, office wages and salaries, and expenses such as stationery, office supplies, postage, and other necessary administration and management expenses
- selling and marketing expenses associated with the products or services being acquired under the contribution agreement.
6. Allocation of indirect costs
(applicable only when PWGSC rates are to be used; see Form 2A: Breakdown of eligible costs
Indirect costs must be accumulated in appropriate indirect cost pools, reflecting the company's organizational or operational lines, and these pools subsequently allocated to the project or contracts, in accordance with the following principle:
- The costs included in a particular indirect cost pool should have a similarity of relationship with the project or contracts, as applicable, to which that indirect cost pool is subsequently distributed; further, the costs included in an indirect cost pool should be similar enough in their relationship to each other that the allocation of the total costs in the pool provides a result that would be similar to that achieved if each cost within that pool were separately distributed.
7. Non-eligible costs
Notwithstanding that the following costs may have been or may be reasonably and properly incurred by the company during the performance of project activities, they are considered non-eligible costs:
- allowance for interest on invested capital, bonds, debentures, bank or other loans together with related bond discounts and finance charges
- legal, accounting and consulting fees in connection with financial reorganization, security issues, capital stock issues, obtaining of licences and prosecution of claims against the Minister
- losses on investments, bad debts and expenses for the collection thereof
- losses on other projects or contracts
- federal and provincial income taxes, goods and services taxes, excess profit taxes or surtaxes and/or special expenses in connection therewith
- provisions for contingencies
- premiums for life insurance on the lives of officers and/or directors when proceeds accrue to the company
- amortization of unrealized appreciation of assets
- depreciation of assets paid for by the Minister
- fines and penalties
- expenses and depreciation of excess facilities
- unreasonable compensation for officers and employees
- product development or improvement expenses not associated with the product being acquired under the project
- advertising, except reasonable advertising of an industrial or institutional character placed in trade, technical or professional journals for the dissemination of information for the industry or institution
- entertainment expenses
- dues and other memberships other than for regular trade and professional associations
- fees, extraordinary or abnormal for professional advice in regard to technical, administrative or accounting matters, unless approval from the Minister is obtained
- any cost relating to land or buildings.
Notwithstanding the above, legal, accounting and consulting fees in connection with the obtaining of patents and statutory protection of other elements of the intellectual property are eligible costs.
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