Individuals and corporations in Canada can apply for lucrative tax credits for completing scientific research and/or experimental development (“SR&ED”). Industrial tax credits have been part of Canada’s economic tax plan for decades, more specifically since the 1940s. “Each year the SR&ED program provides over $4 billion in investment tax credits (ITCs) to over 18,000 claimants. Of these, about 75% are small businesses.” (CRA RC4472). There is a lot to gain from these credits and also a lot to lose if the claim is not completed correctly. Choosing the right organization within Canada to assist with your scientific research and experimental development claim is essential for success.
SR&ED or SRED is the “Scientific Research and Experimental Development” program that is offered by the Federal Government of Canada. SR&ED consultants widely consider the SR&ED incentive program to be generous to companies that are able to partake in it because it allows companies, large or small, to benefit by giving them the ability to conduct research and development endeavors on Canadian soil.
The Scientific Research and Experimental Development (SR&ED) incentive is most beneficial for Canadian owned and run private corporations. Private Canadian corporations can receive SR&ED tax credits for a substantial amount of up to 35% of qualified expenses up to the first $3 million. For qualified expenses of over $3 million, private Canadian corporations can receive incentives of 15%. Alternate Canadian entities like partnerships, public companies, trusts, and more, can receive tax incentives that equate to 20 percent of eligible expenses for SR&ED conducted within Canadian borders.
The SR&ED benefits are very significant for start-ups. Oftentimes at early-stage companies, the leaders and employees need to sacrifice their salary as the opportunity cost for keeping their business afloat and following their entrepreneurial dreams. SR&ED incentives and credit can offer founders and CEOs alike relief by reimbursing the business a percentage of costs related to Scientific Research and Experimental Development. The higher your costs associated with SR&ED activities that are completed in Canada, the higher the percentage return from the government as an incentive for completing these activities.
Who Can Benefit from SR&ED
To many people, SR&ED may seem like a daunting credit that is only reserved for large corporations who are engaged in “cutting edge” technological advancement, fortunately, this is not the case. The truth of the matter is that almost any corporation or small business can have segments of SR&ED effort occurring at any given moment. If any of your employees are actively working on finding a solution for scientific research and/or solving technological problems for a solution that does not exist, then there is a great possibility that their work is partly or entirely acceptable for the SR&ED incentive. Some examples of these types of small businesses that can benefit from the SR&ED credit are Tool and Die makers or even Wielding firms.
How to Receive SR&ED Credits
The ability to receive funds from SR&ED claims are determined by two major areas, the profitability of the company and the type of company that is executing the claim. In many cases, the claims are “refundable” because the federal government will send a cheque for the claims even if the claim isn’t required to reduce your tax liability. This is especially helpful for early stage companies who may be operating in a loss position. There are also cases where SR&ED credits can be deemed “non-refundable”, in this case, SR&ED claims are used to cut previous years or forthcoming years tax liabilities.
SR&ED Eligibility and Criteria
More than 95 percent of SR&ED claims are focused on “Experimental Design” rather than Scientific Research. Experimental Design projects have three standards that they must abide by:
– Must have Technological Uncertainty
Meaning that there is no discernible solution to the issue that the corporation is seeking to solve and also that there is no solution easily available through routine research
– Must Conduct a Systematic Investigation
Meaning there should be systems in place and the company should not be taking random shots in the dark. Results from failed experiments should be documented and used to aid in helping to determine the next possible outcome at a solution that should be attempted.
– Must Achieve a Technological Advancement
The wording of the last criteria may seem quite scary at first glance, however, this is not the case. There is no condition to have a successful project conclusion in order to fulfill this criterion.
As long as your corporation is trying different approaches to solve the problem, even if you are failing, you are still ruling out techniques that are not achievable, thereby advancing the technology
Why use a SR&ED consultant
Unless you are part of an Account Executive Program where a CRA officer takes the time to know your business and your research projects well, it is advisable to use the services of a Scientific Research & Experimental Development (SR&ED) consultant. The experience a SR&ED tax consultant can help you navigate the complex laws and administrative red-tape regarding the SR&ED tax credit program. The SR&ED claim consultants are also likely to understand the do’s and don’ts with regards to an application such as what red-flag words to avoid and how to formulate the project description to ensure it is compliant with the law as well as the CRA’s expectations.
A dedicated SR&ED tax consultant is also more likely to stay on top of changing and new legislation which could have significant impact on your SR&ED claim application and how to file it.
How to choose your SR&ED consultant
Choosing the right SR&ED consultant is critical as a rejected claim can be very costly not just for the foregone credits but also because it may invite further scrutiny from the CRA regarding future SR&ED claims. Thus you should consider all the following in selecting the right SR&ED consultant:
Experience and track record
Like any other profession, more experience is correlated with better knowledge and expertise in your field; hence you want to understand your perspective consultant’s background and how long they have been filing SR&ED claims and, if possible, their success track record. Ask for recommendations from previous clients to determine how their SR&ED clients perceive them.
Like many small businesses managing your cash flow is often difficult and tricky and you may benefit from flexible arrangements with your consultant such as pay only upon success of the SR&ED application. The down side to contingent pay is that it typically results in higher fees. So you may prefer a consultant with a lower flat fee or some hybrid arrangement to minimize both cost and risk.
Knowledge of industry
Scientific Research & Experimental Development claims are a complex tax area involving legal, accounting, and technical knowledge. Due to the vastness of the field, professionals often have areas of focus or specializations. Try to select a SR&ED consultant with extensive knowledge of your business or similar businesses to yours.
While many SR&ED consultants work alone, the SR&ED field combines knowledge of the law, accounting, and technology. Hence a SR&ED consultant would benefit greatly and would have better chances of success when working in a multidisciplinary team that involves individuals with technical-scientific backgrounds, accounting backgrounds, and legal backgrounds.
Accreditation with the better business bureau
Look them up on the website of the better business bureau or with a professional body such as CPA Ontario or CPA Canada and see if they are accredited and whether other SR&ED clients have reviews or complaints against them.
With these factors in mind you should be able to find a SR&ED consultant that suits your needs and helps you maximize your SR&ED tax credits. Happy hunting!
SRJ Chartered Professional Accountants is a firm for business and tax accounting in the Greater Toronto Area and throughout Canada. SRJ Chartered Professional Accountants can provide advice on how to file your SR&ED claim. At SRJ, our objective is to identify all facets of qualified technical activities and corresponding expenditures, leading to a successful SR&ED claim completion. Whether you are a start-up corporation or experienced in filing SR&ED claims, our experienced and professional consultants will minimize the disruption from your daily business operations. We have a track record of delivering quality, and we have a strong reputation with the CRA. Our clients range in various industries and are located throughout Ontario, Canada, and also in the US and overseas. For more information please call us directly at 647-725-2537 or send an email to email@example.com.
Frequently Asked Questions
What does SR&ED stand for?
SR&ED or SRED is the “Scientific Research and Experimental Development” program that is offered by the Federal Government of Canada.
What are SR&ED tax credits?
The Scientific Research and Experimental Development (SR&ED) incentive is most beneficial for Canadian owned and run private corporations. Private Canadian corporations can receive SR&ED tax credits for an immense amount of 35% of qualified expenses up to the first $3 million. For qualified expenses of over $3 million, private Canadian corporations can receive incentives of 15%. Alternate Canadian corporations like partnerships, public companies, trusts, and more, can receive tax incentives that equate to 20 percent of eligible expenses for SR&ED conducted within Canadian borders.
How do you calculate R&D tax credits?
It is vital to find a SR&ED consultant that understands all the expenses that can be claimed and the credits that a corporation will thereby benefit from. So what exactly are these expenses? Expenses that can be included in your SR&ED claim are:
- Wages of employees directly associated in SR&ED activities as well as some of their support staff.
- Consultants that are directly working on activities associated with the SR&ED claim.
- Other costs such as overhead.
- Expenses incurred due to the SR&ED project.
- Cost of capital for equipment that is bought in the attainment of technological advancement.