Every year the federal government awards approximately $4 billion to Canadian companies making Scientific Research & Experimental Development (SR&ED) claims. However the SR&ED program can be complicated and confusing. Many potential refunds and tax credits go unclaimed simply due to low levels of awareness of the program, or business owners being unsure of what qualifies or how to properly submit a claim.
When you consider that companies performing eligible SR&ED work can get as much as 68% of their expenditures back in tax credits and cash from the government, making a SR&ED claim can have a very measurable impact on your bottom line. If you own a private Canadian company it’s well worth investigating to identify potential tax deductions, credits or refunds. It’s best to work with an experienced SR&ED advisor who understands the process, but you can get started on the right path by avoiding some of the more common pitfalls.
Pitfall #1 – Not understanding what can be claimed
When many people think of scientific research and experimental development they interpret that to mean work carried out in a laboratory environment by skilled scientists in white lab coats. This is one of the most common misperceptions about the SR&ED program. In fact, SR&ED activities for many small businesses can be integrated with their daily business activities. To determine whether you may qualify for SR&ED benefits, consider whether you are developing a new product, making improvements to an existing product, or improving the methods by which you produce an existing product? If the answer is yes, you could qualify and should consult with a SR&ED advisor.
Pitfall #2 – Filing the claim on a timely basis
As with any other claim where you could be receiving a refund, it is to your advantage to file quickly. While you have up to 18 months to file the SR&ED claim, cash today is better than cash tomorrow whether for investment or injection into working capital.
Also, the sooner you make a claim the sooner Revenue Canada will process it. The government has a mandate to process a SR&ED claim that is filed with the company’s original tax return by its sixth-month due date within 120 days, anything else is either 240 days or longer. Filing the SR&ED claim together with the company’s original tax return is the optimal scenario to ensure the benefits can be put to work as quickly as possible.
Pitfall #3 – The owners don’t take a wage
When considering how best to structure income or withdrawals from a business don’t forget to consider the SR&ED tax credit implication. The SR&ED program rewards for expenditures made towards developing technologies. For many firms wages could be the largest applicable expenditure. If a company is paying its owners via dividends this may result in the company not being able to receive refundable tax credits. A knowledgeable tax advisor will be able to work with you to build a comprehensive tax strategy that looks at all angles of the business.
Pitfall #4 – Inadequate Documentation to Support the Claim
Revenue Canada is looking for documentation. From their perspective the claimant has to be able to prove what they said they did. Any documentation that is dated and helps support the work performed will help. While gathering the evidence after the fact is more difficult and time consuming, it can be done. One of the keys to success in supporting or defending a SR&ED claim is to be prepared by having as much information available for the review as possible. A good advisor will help you prepare and will be able to anticipate the tough questions that Revenue Canada may ask.
Pitfall #5 – Poorly Written Technical Report
Having a good accountant or tax advisor is only part of the equation. The new SR&ED claim form changed the technical report requirements to a three-question response limited to 1,400 words. This change has drastically altered how a company presents its SR&ED projects. The claimant needs to be able to describe the project in simple enough terms so that a person with technical knowledge will be able to understand but not so simple to miss the point of describing the difficulties and challenges. This task is tougher than it sounds. It takes a very good technical writer to summarize a complex project into 1,400 words. Seek assistance from someone that has not just the tax expertise to make a SR&ED claim but also the technical knowledge to prepare technical reports for the government.
The tax incentive system for SR&ED activities in Canada is generous; don’t miss the opportunity to benefit. If you think you might be eligible, now is the time to look at your activities. Do not wait until the end of the tax filing process to determine what qualifies. The potential savings can have a measurable impact on the bottom line and the performance of a portfolio. Avoid the common pitfalls and work with an experienced SR&ED tax and technical advisor who understands the process.
Tax savings potential
While tax credit rates differ based on the size of a business and the province the business operates in, the potential savings can be significant. This is evident in the example below, which compares potential after-tax savings for companies across Canada.
|Type of Business||B.C.||Alta.||Sask.||Man.||Ont.|
|Small private companies||$47,564||$47,289||$50,103||$56,019||$46,190|
Funding issues don’t have to keep your from conducting valuable research. The after-tax savings can open up SR&ED opportunities in the form of tax credits to help with cash flow through the early stages of development.
This article was originally published on capitalmagazine.ca.