It's February and the allure of fresh powder, and the promise of a cold pint have brought you "up the hill" for a great day on the slopes. Excitedly sitting on the chair lift you can't imagine what could be better than shredding the mountain right now. To be honest, I can think of a multitude of things – mainly because I dislike the cold and barely tolerate winter. One of those things is writing on the Scientific Research and Experimental Development or "SR&ED" (pronounced "SHRED" – the potential winter wordplay is endless...) program.
What is the SR&ED program?
The SR&ED program is a federal tax incentive program that is designed to encourage Canadian businesses to conduct research and development (R&D) in Canada. The program can give claimants cash refunds and/or tax credits for their expenditures on eligible research and development costs incurred. The Canada Revenue Agency (CRA) administers the program (and most of the associated provincial or territorial programs), so applications are reviewed from a technological perspective but also entail specific reporting requirements for income tax purposes.
Cash back and/or reduced taxes for incurring costs I was going to anyway!!?? Go on...
The return on investment can be quite lucrative, whether it's reducing your tax bill or increasing cash flow for those who are not yet writing with black ink. As an example, let's say I run a technology company (a stretch for a tax accountant to be sure). It is a Canadian Controlled Private Corporation (different types of corporations or individuals are subject to varying levels of credit and/or refund.), and I currently pay myself a $40,000 salary. When I look at my timesheets, I can attribute just over 70% of my time to eligible research and development efforts. Under a common method of claiming a SR&ED credit, a successful application can yield a cash refund of about $18,000 assuming no corporate taxes are payable for the year of the claim. Ignoring tax-effecting these numbers, that's about a 45% cash return on investment on salary costs that I was spending REGARDLESS of the SR&ED program. The return is 64% if I just consider the salary costs for SR&ED efforts only.
What's the catch?
The biggest catch is ensuring that the research and development costs you base your claim on are "eligible" as defined by the Income Tax Act. In a nut shell, this means that the costs incurred must be for:
1. Basic research,
2. Applied research,
3. Experimental development, and/or
4. Support work for the above three.
How you fit into one of those four categories is a matter of fact. And the fact is, you're likely in the best position to determine this. There are however, a number of tools that exist to assist you.
The second biggest catch is ensuring that the required tax disclosures (which can span over multiple years for certain claims) are made so that the refund or tax break you enjoy stays yours in full, and that you file a claim on time. You must file a SR&ED claim within 18 months of your tax year. This is where the tax group at Crowe MacKay can help ensure full compliance.
Take Away
So when you're sitting on the chair lift anxiously waiting to get to the top, consider using some of that time thinking about how much of your work day consists of research and development for your business. Your efforts may be more valuable than you think.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
