RE:RE:R&D Spin-off AnswerLooks like instead of paying the R&D and related expenses directly, PHO pays expenses to the R&D company (which is revenue to that company who uses the funds for research expenses). I guess there could be funding from other parties, but that doesn't seem to be the point of the company from what I can tell.
For example, from the PHO 2014 financial statements:
Charges from: 2014 2013
Products & services charged by Photon Control R&D Ltd. $ 212,497 $ 493,452
Engineering & R&D services charged by Photon Control R&D 916,550 792,026
Royalty expenses charged by Photon Control R&D Ltd. 1,262,509 922,292
There's a big SR&ED (scientific research and experimental development) tax benefit to doing it this way. If the R&D expenses are paid in PHO, they would get a 20% non-refundable federal tax credit (it was recently brought down to 15%) plus likely some provincial tax credits. This would have been useless for the company at that time since they were not taxable and had lots of non-refundable SR&ED tax credits and non-capital loss carryforwards at the time. (In fact, the company still had the unused SR&ED tax credit of $1,791,011 at the end of 2014 which has been outstanding since 2008, despite recent profitability).
By using a CCPC, they would be eligible for the 35% federal
refundable tax credit, which they would actually get cash back for, even if the company isn't profitable. I assume there would also be some refundable provincial tax credit (for example in Ontario it's 10%). That's pretty significant, consider in 2007 (last full year before the R&D company was set up), R&D expenses were $2,589,741.
So at least from a tax perspective, it looks like a pretty good idea.