Are you running a small business and seeking a guide for your SR&ED claims?
The Scientific Research & Experimental Development (SR&ED) program is a tax incentive for Canadian businesses committed to innovation as a critical part of their business activities. Its purpose is to encourage companies to take risks involved with research and development.
If you’re looking for a guide to your SR&ED claim, keep reading or contact us for more information.
What are SR&ED Tax Claims?
The SR&ED (Scientific Research and Experimental Development) tax claim is a significant funding source for Canadian-controlled Private Corporations (CCPCs) that meet specific eligibility requirements.
This program offers over $3 billion in incentives and has over 20,000 participants. It’s the largest program of its kind in Canada and is run by the Canada Revenue Agency (CRA).
The program’s purpose is to offer incentives to companies undertaking significant projects, including necessary risks associated with scientific innovation.
Because of their smaller size and scale, SMEs, in particular, can get the most benefit out of this type of tax incentive and are highly encouraged to apply.
The majority of applicants are small businesses whose claims range from $20 000 to two million dollars.
Here are some features of this tax claim:
- The CRA can refund up to 35% of relevant expenses
- The refund can come in cash or as a tax credit
- Businesses who qualify can receive up to 3 million dollars of an SR&ED expenditure
Anything above the $3 million limits can be claimed at a 15% rate, which is non-refundable and can be used to offset future tax.
SR&ED tax claims can be a bit complex, which is why we’re here to be your SR&ED guide. We’ll help you understand how to stay organized with your projects, how to stay on top of your paperwork, and how to fill out your SR&ED claim accurately.
What types of businesses are eligible for an SR&ED claim?
This is a Canadian government tax credit program supporting corporations, startups, SMEs, partnerships, and sole proprietorships investing in R&D. Non-CCPCs, as well as trusts and foreign corporations, may also be eligible.
This tax incentive is also available to businesses across various industries, including health care, software, oil and gas, biotech, construction, cannabis, and more.
Most businesses that meet the eligibility and develop new technologies, evolve existing technologies, or develop new projects should qualify.
Is your business eligible? Check out this article, 5 Questions to Ask to Know if you Qualify for an SR&ED Claim to learn more.
About SR&ED Work and Expenses
According to the Income Tax Act, scientific research and experimental development is work that involves
“systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…”
This includes basic or applied research, as well as experimental development. It may include:
“..work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research.”
The type of work and/or projects that would not be eligible for the SR&ED incentive includes market research, sales, quality control, prospecting, social sciences, improvement of existing products, and routine data collection.
(For more information, follow the link to our blog about eligible SR&ED expenses.)
Calculating an SR&ED Claim
A person who acts as your SR&ED guide and advisor will be able to help you understand the best way to calculate your claim.
The traditional method means adding up all of your expenses, which sounds like a simple addition exercise, but can become complex.
This standard method tends to work best for businesses that have higher overhead costs and lower labour costs.
But there is another method, the proxy method, which includes salaries as part of the overhead expenses.
If your projects require high amounts of labour compared to overhead costs, the proxy method can help you get the maximum value of your claim because of this 55% boost. Tech companies are an excellent example of this because they typically have lower overhead costs.
Get help from an SR&ED consultant to make sure your claim is calculated correctly.
Documenting Your SR&ED Activities
You will need support documents to help tell the story of your research project. This includes details about your hypotheses, objectives, advancement goals, project planning, timelines, methodology, and metrics, to give a few examples. (See Appendix 2 of Guide T4088 for more information.)
All of your work must be documented carefully as audits (reviews) happen in about 20% of claims.
While the idea of an audit may seem stressful, if you make your claim correctly and document everything well, there should not be any negative consequences as it is simply an evaluation of your research activities.
Keep all key documents related to:
- Experimental design
- Project planning
- Trial run records
- Progress reports
- Testing protocols
- Data
- Expenses
- Accounting
- Invoices
- Timesheets and payroll
- Leases and contracts
Anything you can supply that can prove and justify the research process and accompanying expenses will be helpful in an audit, so keep your projects highly organized.
To stay on top of it all, remember doing this organizational work year-round and consider hiring support staff to help you stay organized.
SR&ED Deadlines
The deadline for corporations to file an SR&ED claim is 18 months after fiscal year-end and 17.5 months for individuals.
We recommend that you have your claim ready to file at least three months before the final deadline. You can process these forms along with your corporate or personal tax returns. A successful and complete claim takes approximately two months to be processed unless it’s selected for review, in which case the CRA will confirm the next step within 180 calendar days.
All applicants should be advised that these deadlines are firm, and it’s challenging (and impossible) to get an extension.
Consult with an Expert as Your SR&ED Guide
Smaller businesses can enjoy significant benefits from filing an SR&ED claim because they need that extra boost to keep their R&D going and keep their company growing. But staying on top of competition can be challenging for busy businesses that do not have a dedicated accounting team.
Having an SR&ED professional to help you through this process will make it easier and bring you peace of mind that you’re not risking making costly mistakes as you fill out your claim.
We want to help you focus on what’s most important: growing your business. We aim to help small businesses in Canada not just meet but exceed their R&D goals.
Contact us today to learn more!