The Importance of SR&ED
The SR&ED program is the most generous industrial R&D (research and development) incentive in Canada, distributing billions of dollars per year in tax credits. Its size and applicability to most fields of science and technology make it a critically important program to any for-profit organization engaged in R&D. Don’t put your company at a competitive disadvantage; learn how to make the most of this key research incentive.
Developing new technology requires a vision and a plan. Maximizing SR&ED tax credits requires the same forethought. Here are some tips:
- Your organization should review upcoming projects for potential eligibility and financial relevance early in the development cycle.
- Projects that look promising should receive management recognition of their experimental nature and be tracked appropriately (see below on documentation).
- Ensure that you have a system for generating and tagging R&D documentation so it can be easily referenced during the preparation and defense of your SR&ED claim.
Upfront planning allows you to make informed decisions about the execution of the project. For example, it often makes the most sense to hire a Canadian contractor as opposed to engaging a foreign firm to assist with your research.
Proactive planning pays big dividends when it comes to SR&ED. TSGI will assist you to structure your R&D process to maximize your SR&ED tax credits.
Approaching your innovation systematically is a key requirement of the SR&ED program. This means, among other things, that you should start out with a technical plan and maintain appropriate documentation throughout the life of the project. The level of technical record keeping expected depends on the norms for your industry, the type of organization involved (large, sophisticated corporations may be held to a higher standard), and how significant the project is. Examples of key documentation include:
- Technical planning documents
- Resource allocation records
- Experimental designs or protocols
- Project or lab notes
- Project management documents
- System or architecture designs and/or source code
- CAD or technical drawings
- Meeting minutes
- Analyses of results
- Final reports
- Prototypes, samples or scraps (or records of these)
CRA expects SR&ED records to be contemporaneous: created as the project progresses, not significantly after the fact.
TSGI helps our clients develop proper technical documentation to support their SR&ED claims. Please contact us to learn how to improve your recordkeeping processes.
The requirements for financial documentation are somewhat clearer than for technical records but many companies lose valuable tax credits through mistakes. At the very least, you should be able to:
- Clearly identify your costs and how these link to the research being conducted (linkage can be difficult to achieve at the activity level)
- Show how you segregated SR&ED-eligible from ineligible costs
- Provide support data for how you allocated wage amounts (time records with good descriptors are strongly recommended)
Don’t let a claim for a great project die because of poor record keeping!
The burden of proof is on the taxpayer to validate the eligibility of a SR&ED claim using contemporaneously generated documentation (both technical and financial). Claims that do not meet an acceptable standard may be denied as “unsubstantiated”. The key to success is to find methods to meet these requirements with the least additional work or disruption to your team.
TSGI helps our clients develop proper financial records to support their SR&ED claims. Please contact us to arrange for a consultation on how to improve your financial documents.
Optimal SR&ED results are achieved by aligning your corporate priorities with a SR&ED approach that produces the best long-term tax position. There is no point generating tax credits if your organization can’t use them or if pursuing tax credits interferes with higher priority objectives (like getting your technology to market rapidly).
Picking the right organizational structure to execute R&D, deciding when to take a company public, and determining remuneration policies are all instances where a multi-year, holistic, view makes the most sense. These decisions lay the foundation, not just for your SR&ED results, but for the success of your R&D program; make them wisely with full knowledge. Please contact us to learn how to make the best strategic decisions for your organization.
The SR&ED program is an enormous benefit to R&D performers in Canada but it is not a cure-all for your tech funding problems. Don’t make the following common mistakes:
- Overestimating Your SR&ED Tax Credits. Many people assume that every R&D dollar will generate tax credits and will do so at the most preferential rate. Some development projects do not meet the eligibility criteria of the program and many that do will have costs that are not allowed. Even when all the criteria are met, it is possible to “cap out” on allowable proxy expenditures (if you don’t have sufficient corporate expenditures) or provincial tax credit maximums (in Alberta for instance). Also, you cannot claim tax credits on expenditures for which you have received government or non-government assistance.
- Assuming That All SR&ED Benefits Will Be In Cash. Many taxpayers are eligible for fully refundable tax credits but it is important to keep in mind that there are frequent exceptions to this. The refundability of a claim depends whether your expenditures are current or capital in nature, which province they were incurred in, your business structure (e.g. partnership, public company, private company, trust), and your previous year’s income and capital asset base. (Note that capital expenditures are only eligible until December 31, 2013).
- Failing to Allow Sufficient Time to Receive Tax Credits. The SR&ED program doesn’t contribute upfront for technology development; claims are submitted with your tax filing after your fiscal year end. Depending on your circumstance, the CRA may take between 10 days and 12 months to complete their initial assessment of the eligibility of a project. Some claims take significantly longer if CRA personnel review your work and disagree with your eligibility assessment. Even once you’ve received notification of success, some organizations can’t benefit from the tax credits until they are taxable. Make sure you’ve projected your cash correctly!
TSGI helps our clients determine eligible expenditures and properly file claims. Please contact us to discuss the level of SR&ED support your corporation is entitled to.
Any organization can submit a SR&ED claim for itself along with its tax filing for the year. Some general Chartered Accounting (CA) firms will assist you with this process, but there comes a time when it makes sense to get help from a consultant that specializes in this area. The Institute of Chartered Accountants of Alberta recognizes this by distinguishing SR&ED as a category of specialization within the field of tax accounting. Expert advice starts to pay off when you meet one or more of the following criteria:
- Your R&D spent exceeds about $150K/year (entrepreneurs: add in fair market compensation for yourself)
- Multiple associated or related legal entities are involved
- Cases of partnerships, trusts or joint ventures executing SR&ED
- Suppliers or customers participate in the development through non-trivial contractual arrangements
- You are an oil and gas producer or service company
- Your project spans multiple years and/or multiple provincial jurisdictions
- Foreign-based entities are involved (either part of or outside of your organization)
- There could be dispute about who should get the SR&ED claim
- The technology developers are owners in the company
- Your claim is primarily software-based