Originally published on Techvibes, Wednesday, April 16, 2014
Is your company working on research or experimental development? If so, and you’re not already claiming the SR&ED tax credit, you’re missing out on valuable funding.
The Scientific Research & Experimental Development (SR&ED) tax credit program allows eligible businesses to recover up to 64% of their R&D expenses. The program’s definition of research and development—especially the experimental development part—is broader than most people think. For SR&ED, R&D means you’re systematically working to advance your technology while tackling technical challenges.
Most companies applying for the SR&ED program don’t need to be on the same level as Google or Area 51 for their work to qualify as R&D. The SR&ED program considers what’s available in the public domain and your company’s specific context. If you can’t find a solution to your technical problem in the public domain, that’s where your SR&ED work can begin. Sometimes, technical challenges come from your unique situation—like supporting legacy systems or using older equipment. If you overcome these challenges in a systematic way, your work could qualify for SR&ED tax credits.
Here are the eight most common misconceptions we want to clear up so you don’t miss the June claim deadline:
1. “SR&ED is a grant for R&D.”
As mentioned above, the SR&ED program isn’t a grant or a voucher. It’s a tax credit—refundable or nonrefundable, depending on your company’s size and structure—that you apply for when you file your corporate or personal taxes.
In short, SR&ED is a cost recovery program. You can apply for the credit after you’ve paid your R&D expenses.
2. “SR&ED only applies to large companies.”
The SR&ED program is open to both small and large companies, as well as partnerships and sole proprietors. That’s a big advantage—it means startups in the pre-revenue phase can benefit just as much as large established businesses. The program is based on your expenses, not your revenue, so as long as you’re spending, you can claim.
Company size does matter when it comes to your refund rate. If your taxable net income (before taxes) is under $500,000, your tax credit is refundable. In practice, this means the government will send you a check if your taxes are paid up.
3. “SR&ED-eligible projects must be done in research labs.”
Many people think SR&ED is only for traditional research in a scientific lab. But as we mentioned, most SR&ED claimants aren’t wearing lab coats or working with beakers.
The CRA has shared that about 95% of SR&ED claims are for experimental development. This means work done to create new or improve existing materials, devices, products, or processes. No need for lab coats or traditional scientific research.
4. “Only projects with successful outcomes can be claimed.”
Not true. You can claim unsuccessful projects too.
In fact, the key to a strong SR&ED claim is showing that you faced technical challenges. If your project didn’t succeed, that actually demonstrates there was real uncertainty and obstacles to overcome. As long as you faced technical uncertainty and followed a systematic process to address it, the outcome—success or failure—doesn’t matter.
5. “This program is only for the high-tech sector.”
While SR&ED is popular in the ICT sector, it’s also available to companies in manufacturing, oil and gas, agriculture, biotech, and more.
Some great examples of SR&ED-eligible projects in these industries include:
[list list_style=”darkGrayDot”]
- Trying to speed up manufacturing while maintaining quality;
- Modifying existing equipment to use it for a new purpose; and
- Pushing past hardware constraints to hit ambitious performance goals or achieve a minimal footprint
[/list]
6. “My accountant has to prepare my SR&ED claim.”
Your accountant does need to include the SR&ED claim form (T661 Parts 1 & 2) and the provincial schedule in your corporate tax return, but they don’t have to prepare the claim itself. That’s up to you.
In my experience, technical advisors are best equipped to prepare SR&ED claims. Successful claims focus on technological uncertainty, achievements, and the systematic technical process involved—areas where many accountants and business professionals may not have the technical background to fully understand the work. The advisors I work with have engineering and software development expertise, so they can clearly explain your technical challenges and accomplishments.
7. “I need a formal time tracking system to document my work.”
If you’re concerned about your time tracking, rest assured there are other ways to systematically estimate the time spent on an R&D project—especially if this is your first SR&ED claim.
Many software developers working with agile methods often realize they haven’t tracked as much information as they’d like. If that sounds familiar, don’t worry—you can still use dated journals, emails, photos of whiteboard sessions, version control, and more to document your time and technical challenges. The advisors I work with can recommend time tracking approaches that won’t take up too much of your time and will help you stay organized for future claims.
8. “If my SR&ED claim is reviewed, my company’s entire finances will be audited.”
This is the most common misconception that stops some companies from claiming their SR&ED-eligible work. If your SR&ED claim is selected for a CRA review (audit), the CRA only looks at your SR&ED-related expenses and technical documentation—not your entire company’s finances.
In Summary
Don’t leave money on the table. Explore the program and see if your development work qualifies for an SR&ED claim. With a generous 18-month window (after your company’s fiscal year-end) to file amended claims, there’s still time.
[optinform]
