SRED

HOW DOES THE SR&ED PROGRAM WORK?

OVER 40% OF YOUR MONEY REFUNDED!
Canada's Scientific Research and Experimental Development (or "SR&ED") tax credit program provides generous incentives for companies which conduct scientific research and development.

The Income Tax Act defines scientific research and experimental development as: "a systematic investigation or search carried out in a field of science or technology by means of experiment or analysis…" (ITA, Subsection 248(1))

Typical Canadian corporations can receive a federal tax credit or refund of 35% of their eligible research expenses each year. Ontario supplements this with an additional 10% tax credit based on the same criteria and claim. Your company may qualify for a generous tax credit or a refund cheque if the credit exceeds your taxes due.

SR&ED is, without question, the best government program available to support research and development in Canada. Interestingly, very few companies know of its existence, or know how to go about the claim process. A study conducted by BDO Dunwoody Chartered Accountants estimates that only 15% of eligible companies actively claim SR&ED.

ELIGIBILITY
Corporations eligible for SR&ED tax credits must be Canadian-owned, and the R&D activities must occur in Canada. If a company’s research and development activities occur in both domestic and foreign spheres, only domestic activities will be considered eligible. Activities must be scientific and/or technical in nature.

The image of “research and development” often conjures up images of people wearing white coats in laboratories full of test tubes. While there are many instances of R&D activities in such environments, R&D conducted on the shop floor is equally eligible; in fact, the majority of our clients are shop-floor innovators.

Approved activities include:

Experimental Development
Applied Research
Basic Research
Support Work

THE CLAIM PROCESS
All SR&ED tax credit submissions must include technical and financial submissions. The strength of the overall claim is based on a convincing interdependence of each portion. Activities must be clearly defined in technical fashion, accompanied by a snapshot of associated costs.

In today’s environment of concerns pertaining to government accountability, it is especially important to assist Canadian Revenue Agency SR&ED staff by submitting clear, concise technical claims. CRA staff are much more interested in qualifying clients for SR&ED tax credits than disqualifying them, but there is no doubt they feel pressure to ensure their approved claims are of the highest quality and integrity.

A SR&ED Expert will work with your technical and financial staff to identify and capture credible, eligible R&D projects. They will prepare your technical submission in accordance with Part 2 of the T661 Claim for Scientific Research and Experimental Development (SR&ED) Carried Out In Canada, and assist your financial staff in identifying eligible costs.

SR&ED tax credits are claimed alongside your regular T2 corporate income tax, and follow the same filing deadline of 18 months following your fiscal year-end. If you have never submitted an SR&ED claim, you can also claim for one year prior to your current year due; you must, however, submit an appropriate, amended T2 form with the accompanying T661.

THE REVIEW PROCESS
Submitting a first-time SR&ED claim generally triggers an SR&ED technical and financial audit. Not to be confused with a general corporate financial audit, the SR&ED audit is based solely on the technical merit and the eligibility of expenses related to SR&ED projects claimed.

The standard procedure for the audit begins with a phone call from an SR&ED auditor, to set up the date and time of his or her visit. Once you have scheduled the visit, just give the SR&ED Expert a call and they be there!

Your SR&ED Expert will strive to make the technical audit process effortless for our clients. With all supporting material carefully documented for the purpose of the claim, the CRA visit most often becomes a simple formality.

Once audited, Canadian Revenue Agency staff submits a “letter of offer” to you, based on their evaluation of the technical and financial submissions. If items claimed are deemed ineligible for the purpose of the SR&ED claim, they are explained within the letter.

On your behalf, your SR&ED Expert will indicate your acceptance or rejection of the assessment, based on their in-depth knowledge of your claim. If required, they will petition the assessment on your behalf.

WHEN DO I GET THE MONEY?
For claims related to your current tax year, it is the Canadian Revenue Agency’s goal to complete the review process on refundable SR&ED claims within 120 days of submission.

For claims related to income tax years that have been previously filed, it is the Canadian Revenue Agency’s goal to complete the review process on refundable SR&ED claims within 240 days of submission.

The Ontario Innovation Tax Credit (OITC) is filed alongside the federal SR&ED claim, using a separate OITC form. Calculated on the same SR&ED project values as determined federally, your provincial credits arrive a little later than the federal credits.

WHAT IS ELIGIBLE WITHIN THE SR&ED PROGRAM?

ELIGIBLE R&D
Within the program, research and development is considered as an increase in knowledge as a result of a systematic investigation. This definition fairly encompasses research and development on shop floors, as much as in laboratories.

The program does not specifically reward success or failure; knowledge can be as much how to do something, as how NOT to do something! SR&ED Experts specialize in identifying eligible SR&ED activities and communicating a client’s research and development program in a manner that maximizes tax credit benefits.

EXPERIMENTAL DEVELOPMENT
Experimental development is work done to achieve a technological advancement that creates or improves new products, processes, devices, and materials. Most SR&ED claims are based on this category of eligibility.

APPLIED RESEARCH
Applied research is done to advance scientific knowledge with a specific practical application in view. Rather than creating a new product, process, device or material, however, the research in this category is more theoretical/conceptual in nature.

BASIC RESEARCH
Basic research is done to advance scientific knowledge without a specific practical application in view. Rather than creating a new product, process, device or material, however, basic research is more theoretical/conceptual in nature.

SUPPORT WORK
Eligible support work is done in conjunction with eligible experimental development, applied and basic research. It includes only the following 8 specific types of work:

Engineering;
Design;
Operations research;
Mathematical analysis;
Computer programming;
Data collection;
Testing;
Psychological research.

CRITERIA FOR ELIGIBILITY
The approved SR&ED activities indicated earlier in this section must also meet these three criteria:

Scientific or technological advancement. There must be a sense of advancement or accomplishment as a result of the work; an increase in scientific or technological knowledge. The advancement can be just as much on HOW to do something, as HOW NOT to do something; even “failed” projects can be eligible. Nonetheless, work must actually be done to prove or disprove a hypothesis or concept.

Scientific or technological uncertainty. There must be a degree of uncertainty to the work being done, and the uncertainty must be technical in nature. Ignorance of standard methodology does not qualify as an uncertainty; the uncertainty must be real, and present a challenge whose solution is otherwise unknown to the client.

Scientific and technical content. SR&ED activities must, of course, be technical in nature.

INELIGIBLE ACTIVITIES
Work that does not qualify as eligible SR&ED activities include:

Research in social sciences and humanities;
Commercial production of a new or improved material, device, product or process (work must be isolated from commercial activity, though the work leading up to commercial production is eligible);
Style changes;
Market research or sales promotion;
Quality control or routine testing of materials, devices, products or processes;
Routine data collection;
Prospecting, exploring or drilling for or producing minerals, petroleum or natural gas.

Justin A. Frape, Telos Business Solutions www.telossolutions.ca

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