Is your company conducting research or experimental development? If so—and you’re not already claiming the SR&ED tax credit—you’re leaving money on the table.
The Scientific Research & Experimental Development (SR&ED) tax credit program helps eligible businesses recover up to 64% of their R&D expenditures. The program’s research and development definition, particularly the experimental development portion, is somewhat different than what most individuals think of when they hear "R&D." In regards to the program, R&D means that you are trying to advance the state of your technology through a systematic approach while overcoming technical challenges.
Most companies applying for the SR&ED program don’t need to compete with Google or Area 51 in order for their work to be considered R&D. The SR&ED program takes into account information available in the public domain as well as the context of your company. If you can’t find a solution to your technical problem in the public domain then this is where your SR&ED work may begin. Certain technological challenges arise from constraints faced by your specific situation due to legacy support issues or legacy equipment used. Overcoming these types of technical challenges in a systematic way could make the work eligible for SR&ED tax credits.
Here are the eight most common misperceptions that we’d like to address so you don’t miss out on the June claim deadline:
1. “SR&ED is a grant for R&D.”
As I explained above, the SR&ED program is actually not a grant or a voucher. It is a tax credit (either refundable or nonrefundable, depending on the size of the company or legal entity type) that you must apply for when you submit your corporate or personal taxes.
Basically, SR&ED is a cost recovery program. You can apply for the credit after you’ve paid for your R&D expenses.
2. “SR&ED is only applicable for large companies.”
The SR&ED program is applicable for both small and large companies as well as partnerships and sole proprietorships. This is a great feature of the program as it includes startups in the pre-revenue stage all the way up to large commercial organizations. It is tied to expenses and not revenue, so as long as you are spending, you can claim.
Company size matters when it comes to calculating your return rate. If your taxable net income (earnings before tax) is below $500,000, then your tax credit is refundable. This means that the government will cut you a cheque if you’ve paid all your taxes.
3. “SR&ED eligible projects must be conducted in research labs.”
There is a common misperception that SR&ED is only applicable for those doing traditional research in a scientific lab setting. As I explained above, the majority of SR&ED applicants do not wear white lab coats or use beakers.
The CRA shared that approximately 95% of SR&ED claims have been for experimental development. This is work that is performed for the purpose of creating new, or improving existing, materials, devices, products, or processes. No white lab coat scientific research.
4. “Only projects with a successful outcome can be claimed.”
False. Unsuccessful projects can still be claimed.
In fact, the key to a successful SR&ED claim is the ability to demonstrate that there were technical challenges that needed to be overcome. Failure to succeed shows uncertainty and that there are still technical challenges that need to be overcome. As long as there is technical uncertainty and you undergo a systematic process to try to overcome this uncertainty, the outcome, whether it be success or failure, doesn’t matter.
5. “This program is only applicable for the hi-tech sector.”
While very popular within the ICT sector, SR&ED is also applicable in other sectors such as manufacturing, oil and gas, agriculture, biotech and more.
Some great examples of SR&ED eligible projects in these industries includes:
- Working to increase manufacturing speed while keeping quality consistent;
- Retrofitting an existing piece of equipment to use for a different function than it was originally intended for; and
- Overcoming hardware limitations in order to achieve an aggressive performance target or light footprint
6. “My accountant has to prepare my SR&ED claim.”
While your accountant needs to integrate the SR&ED claim form (T661 Part 1 & 2) as well as the provincial schedule into your corporate tax return, they aren’t required to prepare the claim itself. You have a choice.
In my opinion, technical advisors are best suited to prepare SR&ED claims. Successful claims have an emphasis on the technological uncertainty, achievements and systematic technical process undertaken; many accounting and business professionals don’t have as much experience and technical know-how to fully comprehend the technical work performed within a SR&ED program context. The advisors I work with have engineering and software development backgrounds and are highly qualified to speak to your technological challenges and achievements.
7. “I have to document my work with a formal time tracking system.”
If you’re worried about your time tracking system, I’d like to reassure you that there are other ways to methodically estimate the time spent on an R&D project—especially if it is your first time claiming SR&ED.
Many software developers who use agile methods quickly realize that they haven’t tracked as much info as they would have liked. If this is you, don’t worry as you can still use dated journals, emails, photos of whiteboard strategy sessions, version control and more to document your time and technical challenges. The advisors I work with can suggest time tracking methods that won’t take up too much of your time and will keep you on track for future claims.
8. “If my SR&ED claim gets reviewed, my company’s entire financials will be audited.”
This is the most common misperception that holds some companies back from claiming their SR&ED eligible work. If your SR&ED claim is selected for a CRA Review (audit), the CRA only reviews your SR&ED related expenditures and technical content - not your entire company’s financials.
Don’t leave valuable dollars sitting on the table. Look into the program and get your development assessed for SR&ED claim potential. With a generous 18-month (past your company's fiscal year end) timeframe for amended claims, there is still time.