Companies eligible for the SR&ED program should have a clear understanding of SR&ED expenses before they move into making this claim.
This will then track the right expenses and process the claim quickly.
Don’t do it alone if you think you are eligible, but you’re new to the process. A qualified SR&ED consultant can help you process your claim accurately and get the maximum amount.
About SR&ED Tax Credits
SR&ED stands for Scientific Research and Experimental Development. This is a Canadian government tax credit program meant to help businesses invest in research.
The purpose of the SR&ED tax credits is to stimulate research and experimental work in Canadian businesses.
When you claim SR&ED expenses, you can claim back 35 percent of R&D expenses up to three million dollars.
Anything above that can be claimed at a 15 percent rate, which is non-refundable and used to offset future tax claims.
Canadian companies of all sizes, including corporations, startups, and SMEs, may apply.
The Nature of SR&ED Expenses
Any company involved in experimental development and technological advancement with regards to the innovation or improvement of materials, devices, processes, or products should qualify for the SR&ED tax claim.
Common examples include:
- Software, fintech, or blockchain investments
- Coding or computer programming
- Testing or mathematical analysis
- Applied research
Any company undergoing research based on science and technology and approaching that research so that it is hypothesis-based and addresses a specific uncertainty should look into whether they can claim SR&ED expenses.
What types of SR&ED expenses qualify?
First off, to qualify, an SR&ED expense (or “qualified expenditure”) must have incurred:
- In the tax year
- In respect of scientific research and ed
- In Canada
- It was directly undertaken by the claimant
- It is an expenditure of a current nature
There are other specifications to do with what expenses are eligible – check the CRA website for more details or call us.
Three main categories of expenses:
- Salaries and wages for employees and owners during the research
- Fees you pay Canadian contractors
- Materials used for your research
The amount you end up claiming is related to the above.
Wages and Salaries
If employees are hired to support your project, this can be claimed as support costs, so long as you can show that the work is directly related to the project. For instance, staff involved in testing, data gathering, design, or programming may be classified as support costs.
Support positions may include:
- Any staff involved in experimentation or analysis
- Administrative support
- User manual preparation
- Technological planning and documentation
- Machine operators
It’s worth noting that the CRA gives higher refunds to those claiming money for wages and salaries rather than contractor fees.
64% of employee salaries may be claimed, whereas only 32% of contractor fees will be eligible.
Thus, companies that have hired full-time employees have a greater benefit when it comes to this claim.
In addition, about 42% of materials costs can be covered.
Overhead Costs
SR&ED expenses may also be claimed based on overhead costs. You must keep all overhead costs tracked and organized carefully to ensure that the CRA sees them legitimate.
Examples of overhead costs include:
- Facility rent
- Property taxes at said facility
- Equipment
- Cleaning supplies
- Office supplies and equipment
- Utilities at facility
- Storage costs
- Transportation costs
Overhead costs include wages, so use a time-tracking app to ensure that employee and contractor wages are claimed accurately.
If you have not tracked these costs carefully, you can use the Proxy Method to calculate your overhead, salary, and wage expenditures.
What types of SR&ED expenses are not eligible?
All expenses that you claim must be directly in support of R&D projects of the nature discussed above, and this must be supported via legitimate documentation.
Examples of projects and employee work that may not be eligible include those that have to do with:
- Sales
- Commercial production
- Routine maintenance or data collection
- Simplistic or stylistic updates to a current product
- Social science or humanities research
- Activities related to natural resource extraction
The CRA guidelines can be confusing, so call us if you are uncertain.
Get Help With Your SR&ED Claim
The above is just a general description of eligible SR&ED expenses. You may have other expenses that you can claim which may not be listed here.
That’s why it’s important to get help determining which research projects and related expenses are eligible to claim.
The experts at SREDSmart will be happy to help you understand more about your SR&ED expenses, what is eligible, and how to ensure that the claim is filled out properly.
We help companies take advantage of vital research and development funding, grow revenue, and feel confident about innovation.
Don’t miss out on this important tax opportunity. Contact us today to learn more.