If your company is making a SR&ED claim this tax year, it is beneficial for planning purposes to have an idea of the amount you can expect. This article will give you a case study which demonstrates a simplified approach to approximating your R&D tax credit by calculating SR&ED.
SR&ED Claims require detailed reporting which may not be intuitive to your R&D team or accountant
Since claiming SR&ED is complex and you do not want to reviews or rejections of your claim it is wise to have the support of a SR&ED professional. Many of our new clients see a significant increase in their SRED refunds when using our end-to-end services. We’ll help you catch non-intuitive expenses and activities that are routinely overlooked or unclaimed as well as help you implement a tracking tool to simplify the process of your future claims. With zero upfront fees, there is absolutely no risk to your business to access our time proven support!
How much is my Investment Tax Credit (ITC) worth? Calculating SR&ED
The accounting and ITC calculation are relatively complex processes as many factors are taken into account to determine the final value. The following case study provides an example of some of the variables that must be considered:
A food manufacturer conducted SR&ED eligible work and 50% of his time as well as 25% of his engineer’s time was spent on SR&ED. He received remuneration of annual salary of $120,000 from his professional corporation and his engineer received a total salary of $100,000. The steps in the ITC calculation are as below:
Step 1-Salary base (SR&ED portion of salary): $120,000 x 50% = $60,000; $100,000 x 25% = $25,000
Step 2-Overhead and other expenditures (prescribed proxy amount 55%): $85,000 x 55% = $46,750
Step 3-SR&ED expenditures: $85,000 + $46,750 = $131,750
Step 4-Alberta ITC (10% of SR&ED expenditure): $131,750 x 10% = $13,175
Step 5-Federal ITC (35% of SR&ED expenditure): ($131,750 – $13,175) x 35% = $41,501.25
(Note: The Alberta ITC is considered government assistance so the federal government will not award an SR&ED ITC on this amount. The Alberta ITC must be removed from the calculation prior to calculating the federal ITC.)
Step 6-Total SR&ED ITC: $41,501.25 + $13,175 = $54,676.25
A shortcut is to multiply the salary base by 64.3% to come up with the total SR&ED ITC.
How can I maximize the amount of my ITC?
As shown in the calculation, the Investment Tax Credit rates (federal 35%, Alberta 10%) and prescribed proxy amount (55%) are stipulated by Government.
In order to maximize the amount of tax credit, the factors that can be planned and optimized are research time and salary. So, in the context of maximizing the SR&ED tax credit, the tax planning strategies you have in place may need to be revised.
That’s where Enhanced Capital Recovery’s SR&ED team can help. Our financial specialists provide planning strategies for organizations conducting SR&ED projects in order to maximize claims and avoid reviews and delays.