What is the SR&ED Program?
The scientific research and experimental develop program (SR&ED) is a generous R&D tax credit incentive offered by the Federal Government of Canada. The program pays more than 20,000 eligible Canadian Controlled Private Corporations in excess of $3 Billion (CDN) each year.
Recover up to 65% of eligible SR&ED expenses
The SR&ED program is a tax credit system designed to encourage Canadian Controlled Private Corporations (CCPCs) to make technological and process improvements and make Canada a world leader in advanced technology.
As a result, all CCPCs benefit from a high tax recovery rate of up to 65% for eligible expenses. Start-up CCPCs benefit additionally since the tax credit is also refundable, meaning that a refund is provided whether or not the company has any taxes payable in that fiscal year.
Who is Eligible for SR&ED funding?
Almost any Canadian company can be eligible to apply for Scientific Research and Experimental Development (SRED). Here are the details of the criteria from a company perspective:
- Your research & development took place within Canada
- You have proof of expenditures related to the claimed projects, for example T4s, and/or invoices
- You have ownership of the Intellectual Property resulting from the project
- You are in good standing with government financial reporting
- Your project expenses were incurred within 18 months of the fiscal year-end as of filing
The definition of technological advancements can be interpreted broadly and therefore is not limited to specific industries. Generally we work with a wide range of industries including:
- Information Technology, inclusive of hardware, software and electronics
- Food and Beverage
- Health Care and Medical
- Machinery & Equipment
- Plastics and Materials
- Real Estate and Construction
What many businesses don’t realize is that some of the routine business challenges they face each year could be eligible for the SR&ED tax credit. The following examples are illustrations (also read 10 SR&ED examples which show different cases of its application):
- A food-services company improves its recipe for a frozen meat pie;
- A leather-garment manufacturer tries out a new dye and must test garments under various conditions to ensure that the dye stays in;
- A pharmaceutical company develops a new lightweight casing for medicinal capsules but discovers over time that it is not leak-proof and so can’t be used (note: unsuccessful R&D projects are still eligible for the SR&ED tax credit)
- An engineering and manufacturing company develops and modifies plastic molding technology so that it can protect testing components from the hostile oil and gas field environments.
All these activities, and many more business processes like them, result in knowledge improvement for the company and its staff and hence are recognized as SR&ED by the government and are eligible for an SR&ED tax credit.
It is likely that many Canadian corporations in your industry, including your competitors, have received SR&ED funds to develop additional R&D projects and build their knowledge base. For companies with annual revenue of $10 million or less, the vast majority credited the SR&ED program with improving their cash flow and profits.
Are there other types of R&D funding?
One of the benefits of working with a professional consulting firm is that we will inform you of all possible R&D funding opportunities. Most Canadian provinces and territories offer additional R&D tax incentives at a provincial level. Our services include application for both the Federal and Provincial SR&ED programs. Another major funding source is IRAP. IRAP is a non-repayable grant of up to $1 million, but generally ranges from $10,000 to $250,000. We help our clients determine the best type of R&D funding for their situation.
The CRA outlines three requirements your business must complete to earn SR&ED credits:
- You attempted to overcome a technological uncertainty
- You used systematic research and development to solve the problem
- You aimed to advance technology or knowledge in the process
While the experiments must be conducted with a measurable goal, they can involve basic or applied research—advancing scientific knowledge with or without an intended use in mind. For example, if your goal is to improve an artificial flavouring, it does not need to be used for a specific food or beverage.
Your projects do not need to be successful to qualify for funding, as long as you can provide evidence of the attempt.
There is a misconception surrounding the program’s scientific research aspect that it is reserved for medical, biological, or other laboratory research. In reality, the research can be as simple as a video game producer researching methods of advancing game play graphics.
The results are not required to be innovative to the industry, but the acquired knowledge or technological advancements must be new to your business.
Many small businesses qualify for experimental development as part of their daily activities without realizing it. Conducting experiments to create new products, machinery and manufacturing procedures are accepted, but so too are innovative services and support work.
Improvements to existing technology also qualify, such as adapting computer software for enhanced efficiency or improving the machinery to manufacture clothing garments.
What doesn’t qualify?
There are some types of research and experimental development that do not qualify for SR&ED funding. Since the projects must be conducted with a planned approach, any random or routine investigations are not eligible, including quality control procedures.
Work that can be classified as commercial gain does not qualify, such as promotions, market research, or the commercial use of a new technology. Experimentation to a product’s style is also not accepted.
Procedures related to mineral, natural gas, or petroleum production, including exploration and drilling, also do not qualify for SR&ED funding.
The SR&ED program defines, “overhead and other expenditures” as expenditures that may be directly attributable to the prosecution of SR&ED in Canada.
Overhead expenditures in SR&ED, importantly are not to be confused with the definition commonly used under the generally accepted accounting principles in Canada. GAAP accounting rules refer to overhead as an indirect cost. This does not hold true for SR&ED, however, as overhead and expenditures must be directly attributable to the SR&ED activity to be eligible.
The test to determine what expenses are directly attributable
The CRA has developed two tests to show what expenses are directly attributable to the prosecution of SR&ED: “The expenditure must be directly related to the prosecution of SR&ED in Canada; and the expenditure would not have been incurred had such prosecution not occurred.”
A portion of directly attributable expenses may be allowable
If a portion of an expenditure is directly attributable to the prosecution of SR&ED the portion of the expenditure can be allocated to SR&ED work on a “reasonable basis.”
The importance of direct link to SR&ED work
In order for an expenditure to be eligible for SR&ED, the expenditure must be directly related to the following – with no intervening steps:
- “the SR&ED work;
- the SR&ED staff;
- the equipment used by staff to perform SR&ED.”
The CRA views the question of an expenditure being directly related to the prosecution of SR&ED as a question of fact – and as such, the fact must be verifiable and documented to show it.
Enhanced Capital Recovery’s team of technical consultants are experts in helping you determine if expenditures meet these guidelines.
Example of directly related SR&ED expenditures
Here are some examples of expenditures that may be considered to be directly related to the prosecution of SR&ED sourced from the CRA website:
- “Salary or wages of clerical and administrative staff providing a service to SR&ED employees if the functions performed are non‑technological and aid the ongoing SR&ED claimed in the year;
- Contract costs – other than a SR&ED contract Employer’s share of related benefits;
- Moving expenses related to the relocation of SR&ED employees to another facility;
- Lease costs of equipment used less than 90% of the time in SR&ED;
- Other expenditures, such as: long-distance telephone charges, expenses for travel and lodging, cost of training in Canada, cost of utilities; and others”
Directly related expenditures not eligible for investment tax credits
Also, some expenditures may be directly related to the prosecution of SR&ED, but they are considered prescribed expenditures and do not earn investment tax credits. These expenditures could be included in the pool of deductible SR&ED expenditures but would not be qualified expenditures for the purposes of calculating the ITC amount. These include the following, sourced from the CRA website:
- “Fees for preparing SR&ED claims
- Cost to attend conventions or conferences
- Interest expenses
- Certain expenditures, including salary or wages, that relate to the general administration or management of a business are generally not allowable for SR&ED purposes. These costs are not directly related to the prosecution of SR&ED; they are related to the carrying on of a business.”
Examples of indirect expenditures
Expenditures incurred by the business which are generally not directly related to the prosecution of SR&ED are not eligible. A few examples include:
- legal services;
- sales, marketing, and advertising;
- shipping and distribution (other than shipping and distribution costs of experimental products for internal or customer testing);
- production (other than materials or equipment used in SR&ED).”
Barriers and challenges with SR&ED
Although the SR&ED program is an amazing financial opportunity for many businesses across all industries, complex legislation and time intensive report preparation have created barriers for businesses which are otherwise eligible to take advantage of it.
In our experience, it is normal for businesses making SR&ED claims to experience significant difficulty in determining which expenditures are eligible. As a result of this, many eligible expenses go unclaimed.
The importance of getting business and technical expertise on your side
Since technical knowledge of your operations is important to documenting an SR&ED claim, an accountant is often not the best person to complete the task. It is critical that your SR&ED consultant properly understands the R&D processes and technology challenges specific to your organization. Even SR&ED consultants who are not experts within your industry are rarely able to identify eligible activities.
At Enhanced Capital Recovery, you can be assured that you will be assigned consultants that have a deep understanding of your industry and possess experience assisting businesses like yours to maximize your SR&ED tax credits. Our consultants are able to recognize difficult to identify qualifying work which can significantly increase your tax credit.
Our experienced and professional SR&ED consultants will help you uncover all eligible project and expenses, complete your claim to match CRA guidelines, prepare all the technical documentation and forms, and allow you to remain focused on your core business activities.
Our SR&ED claim process
Enhanced Capital Recovery begins the process with assigning you to a SR&ED consultant with the appropriate background to match your industry. There are no upfront fees and no fees during the claims process. Since we are confident in our ability to get results, we only get paid when you do.
The first step is to schedule a working session to determine your SR&ED eligibility and estimate the potential scope of recovery. Our consultant will review past claims to identify any deficiencies and prepare for the working session.
A no-commitment discovery session is conducted with key R&D project leads to understand your project goals, technical challenges and improvements as well as classify those projects which qualify as SR&ED. After the working session, we will provide you with an estimate of the size of the potential recovery.
After a positive assessment of your projects and previous claims, Enhanced Capital Recovery then carries out an extensive review and the claim is completed for submission. Typically the claim preparation is done in 6 to 8 weeks.
Contact us today for a free, no risk consultation to see how we can serve you.