SR&ED tax incentives are used to fund research and development across Canada. Claiming the Scientific Research and Experimental Development program, there is a strict criterion to follow. A project must be presented a certain way, and you need the SR&ED documentation to justify said work as eligible.
The SRED grant is available to Canadian businesses of all shapes and sizes, no matter the sector. You don’t need to be a tech company to qualify for a tax deduction, tax credit, or tax refund via SR&ED. So long as you’ve completed research and development in Canada, you may be able to claim certain SR&ED expenses.
A business can benefit from SR&ED tax benefits in two primary ways. The first is to deduct claimed SR&ED expenditures against current or future income. The second is to use the investment tax credit, or ITC, to reduce income tax payable and obtain a tax refund. In the form of an ITC, the amount can be expected to be between 15-35% on average of qualified SR&ED expenditures.
Use these tips to maximize your refund while claiming SR&ED expenses.
Tip: Know which SR&ED expenses to claim.
To claim SR&ED expenses, a corporation or individual will file an income tax return and include Form T661. Through Form T661, technical information was provided and qualified SR&ED expenses. If you are eligible for provincial R&D tax credits and investment tax credits, Form T2038 will also be used.
To calculate your SR&ED expenditures, you need to use either the proxy method or the traditional method. It does not matter which one you use so long as you use the method for the entire tax year.
Here are some examples of SR&ED expenses:
1. Allowable expenditures
You do not want to claim expenses that have no documentation or are not applicable. Allowable expenditures include salary or wages, materials, contracts for SR&ED, overhead and related expenditures, equipment leases, and third-party payments. There are also payroll expenditures where things can get a little more complicated.
2. Payroll expenditures
Claiming payroll, you include salary and all taxable benefits and bonuses. How payroll is calculated, after you’ve assumed the total of the cost of their salary, factoring into account reimbursement for benefits and health benefits and bonuses, is to multiply the salary by the percentage of time spent allocated to SR&ED projects.
This can be written up for all workers, including those who support the work through administrative duties and those in supervisory roles.
3. Time invested by managers
Time spent supervising and guiding an SR&ED project by managers and senior leadership is includable in SR&ED expense claims. This is calculated as a percentage of a manager’s full salary, like payroll. To do this, though, sufficient documents need to be included.
Evidence includes planning documents and records of project resources, timesheets, contracts, progress reports, etc.
Tip: Know ineligible vs eligible SR&ED claims.
An SR&ED project will need the eligible work to be grouped as some work may be ineligible. In establishing eligibility, one must submit documents to support the work in pursuit of scientific or technological advancement, done through a systematic investigation through an experiment or analysis.
Work performed in Canada
SR&ED only applies to work performed on Canadian soil. If you have remote workers outside of Canada or part of the project work was performed internationally, even if they’re on Canadian payroll, those salaries and that time are not eligible for SR&ED claims.
Be careful when submitting an SR&ED claim on a project with modules or components that are not fully performed domestically.
An SR&ED project is complete when the objective is achieved or abandoned. If it’s a failure, this is not relevant to determining its eligibility. Eligibility is determined based on the methodology and process of the project rather than the success, failure, marketability, or commercial significance.
Tip: Support your claims with documents
Keep any documents related to eligible work and allowable expenses. If your claim is selected by the CRA to be reviewed, you must provide all supporting documentation to justify SR&ED expenses.
You may also be asked to explain how supporting information was used to determine your claimed dollar amounts and justify the expenditures’ purpose. You must have clean, organized records outlining your SR&ED expenses. All records and support documents should be kept for up to six years from the end of the last tax year they relate to in case of an audit.
You will want to use any financial records, financial statements, ledgers, journals, vouchers, electronic records, receipts, contractors, and general correspondence relating to finances. You can also use photographs, videos, and other related documents as forms of evidence supporting your SR&ED expenses.