Stake a claim

Understanding the SR&ED Tax Credit will help business-owner clients

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 clients being unsure of what qualifies or how to properly submit a claim.

When you consider that companies performing eligible SR&ED work can get up to 68% of their expenditures back in tax credits and cash from the government, making a SR&ED claim can have a measurable impact on your client’s bottom line. If you have a client that owns a private Canadian company, it’s well worth investigating to help your client 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 your client 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 Exploratory Development, they interpret that as 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 your client may qualify for SR&ED benefits, ask them if they are developing a new product, making improvements to an existing product, or improving the methods by which they produce an existing product. If the answer is yes, they could qualify and should consult with a SR&ED advisor.

Pitfall 2

Not filing the claim quickly enough

As with any other claim where the client could be receiving a refund, it is to their advantage to file quickly. While the client has 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 a client makes a claim, the sooner CRA will process it.CRA 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. For anything else, processing time is 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 advising your clients on how best to structure income or withdrawals from their 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 the 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 your client to build a comprehensive tax strategy that looks at all angles of his or her business.

Pitfall 4

Inadequate documentation to support the claim

CRA is looking for documentation. From its perspective, the claimant has to be able to prove that the company has carried out the research work. Any documentation that includes dates 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 have as much information available for the review as possible. A good advisor will help your client prepare for the claim, and can anticipate the tough questions CRA 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 a person without technical knowledge will be able to understand, but not so simple as to miss describing the difficulties and challenges.

That’s much tougher than it sounds. It takes a good technical writer to summarize a complex project. in 1,400 words. Advise your client to 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 CRA.

The tax-incentive system for SR&ED activities in Canada is very generous; don’t let your client miss the opportunity to benefit. If you think your client is eligible, now is the time to look at their activities and not wait until the end of the tax-filing process to determine what qualifies.

The potential savings can have a very measurable impact on their bottom line and the performance of their portfolio. Avoid the common pitfalls and work with an experienced SR&ED tax and technical advisor who understands the process.

Sr&eD tax SavingS potential

SR&ED tax credits can have a measurable impact on your clients’ bottom line. While tax-credit rates differ based on the size of business and the province it 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. Funding issues don’t have to keep companies 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.

Type of Business	BC	AB	SK	MB	ON
Small Private Companies	$47,564	$47,289	$50,103	$56,019	$46,190
Large Public Companies	$26,156	$26,341	$29,256	$32,913	$21,654

Ryan Mackiewich is the SR&ED Practice Leader for MNP and has helped companies make successful SR&ED claims for over 15 years. 1.877.475.5678 or ryan.mackiewich@mnp.ca.