The SR&ED (Scientific Research & Experimental Development) Tax Credit Program can support a wide range of industries, especially for software and IT companies. It is a remarkable incentive program for business owners, and every year the Canadian government provides over $6 Billion dollars to companies that make the effort to apply for it.
The program reimburses companies for what is officially called “experimental development expenses”. Translated, it means any research or experimentation you have done to be more competitive in the marketplace. This excludes marketing material or promotional activity, but rather is focused on process oriented activity that shows you are researching and innovating around technical problems that will give you a competitive edge. This research does not have to have a successful outcome, by the way! You just have to show that you spent the time and the money to do it.
The best way to do this is to have the help of a technical engineer. Although your accountant may have some experience with tax credits, usually your accountant doesn’t have the insight that an engineer has, and sometimes the difference between the claims made by both of these professionals can be as much as 100%.
The program has been around for 20 years, so it is not going to disappear over night. And your competitors have probably been taking advantage of it for years! The purpose of the program is to make creativity and innovation affordable and to help Canadian business grow.
What types of activities are eligible for SR&ED?
Here are some of the activities that the Canada Revenue Agency say are eligible for SR&ED:
Overcoming technological uncertainties, and
Activity to make technological advancement
Using systematic investigation, documented by qualified personnel
This is a good fit with software development, any IT business, and any tech business that is working on improving their products or solutions. Here are some examples of what activities in the IT industry SR&ED coud apply to:
Making a software program more efficient
Reengineering
Developing new programming language
Creating a new operating system
Creating a new data management tool
Experimenting with algorithms, architecture, or design engineering
Keep in mind your experiments or investigations do not have to be successful! The idea is to be able to capitalize on the exploration for processes and techniques that will lead to a more competitive product or service. This experimentation could help decrease costs or improve productivity. Again, it is important to have an engineer help you with this type of claim, as they will see inside the processes and procedures you are working on and pull out what has value in the eyes of the CRA.
How much can we get?
You can receive up to 68% of your expenditures back! This can include time, labour, materials, and equipment. Another benefit is the tax refund (which in most cases is a cheque) can be used for anything you like, as there are no conditions on how it is spent. This amount can range anywhere from $70,000 to over $3 millon. Would that not be a benefit to your cashflow this year?
How is the claim made?
The claim is made by filling out tax forms using fairly technical jargon (which is why you should hire an engineer to do it). You only have about 1500 words to get it right, or your claim may be challenged or rejected. The process involves identifying eligible activities that can be supported with documentation supporting the costs, employee time, and materials used. If you have not documented this type of activity beforehand, you can hire an SR&ED engineer to help you document what was done and the costs that were related to it.
Good SR&ED consultants have a failure rate of less that 1%, and not only that, they are compensated for performance only. They recieve a percentage of what you recieve, and only if the claim is successful. Because they are confident with their success rate, it only takes one phone call for them to find out if what you are proposing for a SR&ED claim is viable and worthwhile.
To contact a SR&ED engineer to help you with your claim, go to this link and fill out the form, so that someone can contact you and get the process started right away.
SR&ED Factoring is a method of using a SR&ED tax credit claim to help finance your venture. For any business that does research and development, there is probably a lot invested in the budget behind these activities. In many cases you may want to receive the benefit any tax credits now rather than later. If you are filing for a tax claim that includes a prior year (you have up to two years to claim a SR&ED tax credit) that may mean you are getting double the amount of the original tax credit at the same time. This can be a significant amount of cashflow for a business to take advantage of immediately.
The process of factoring may also be described as “discounting the claim”. The best time to take advantage of this form of financing is when current assets such as accounts receivable do not provide enough cashflow for the working capital your firm may need. Another common form of factoring is when a firm approaches a bank with its accounts receivable and obtains financing based on funds receivable. As a rule, banks are not favorable to SR&ED tax claim credit financing, because of the uncertainty around the approval of the credits, and their limited knowledge of technical and engineering issues.
Typically a firm can get 70% of the tax credit now, and the financing is structured with no principal or interest payments on the SR&ED loan until the approval of the claim. After the claim has been approved, the remaining 30% is released, and financing costs are assessed and charged at this point in time. Overall, SR&ED Factoring is designed to inject cash when a company needs it most and time is of the essence, with financing costs placed into the payment schedule at the end of the period.
Because the SR&ED claim itself is the collateral for the financing, even a firm that is in a pre-revenue state can take advantage of it. It can be beneficial to companies that have other financial challenges as well, and terms can often be negotiated.
Why don’t more companies take advantage of SR&ED?
Here are some of the top considerations Canadian business people have about applying for SR&ED tax credits:
1. “It’s too complicated and time consuming to be worth it.”
Is a tax-free cheque for $70,000 – $1,000,000 worth something to the yearly cashflow of your business? Have a SR&ED Engineer take on the financial risk, while you enjoy fantastic tax credits.
2. “We don’t do R&D, so we don’t qualify”
Since common activities either in the shop or other industrial setting contain elements of research and development processes, any incremental improvements in designs, formulations, or other activities can be eligible. This can include changes in quality, durability, energy effectiveness, and the materials used.
3.“No one here has a PhD, nor do we have a state-of-the-art-lab”
You don’t need either. R&D activities can be either integrated or extracted from daily work regimens, as long as there is a technological advance, technological obstacles overcome, or an increase in knowledge capital.
4.“We did not have any taxable income last year.”
Your company does not have to be profitable! You can still get a refundable tax credit even if you paid no taxes.
5.“The work we did is not that new.”
The eligible work only has to be new to your organization. Advanced processes may exist elsewhere. If you experienced technical challenges and tried to resolve those challenges systematically, you are eligible for SR&ED.
6.“In the end, what we did was not that difficult.”
Technical people will often downplay a challenge after it has been resolved, and this is only natural. The key to SR&ED is to document the process leading to that resolution, and emphasize the difficulties encountered beforehand.
7. “We did not have any success with our project.”
Even if the project has been abandoned or postponed, there are “lessons learned” and man-hours applied to trying to solve the challenges. Technological or commercial success is not necessary!
8. “We claim IRAP already.”
You can claim SR&ED as well.
9. “Almost all of our R&D is subcontracted.”
If you subcontract to Canadian taxpayers and retain intellectual property of the work performed, you can still be eligible for SR&ED.
10. “We may be audited by Revenue Canada if I apply for SR&ED!”
SR&ED reviews and CRA audits are separate. SR&ED is a program that encourages innovation in Canada, and is treated separately from other CRA activities.
In any case, have a SR&ED Engineer help you and your accountant maximize your claim and to avoid having your claim challenged.
In the following pictures of the T661 form, you can see where you have to fill out the technical details of your claim. Make sure you have someone who has done this many times and has succeeded at it — or you may have to defend your claim, spending time and money that could be allocated elsewhere.
How to get substantial tax credits for your business without expending cash or wasting time.
The SR&ED tax incentive program can give you cash-back tax credits for the research you’ve done, and you don’t need a PhD or a research lab to get them. Any taxpayer who runs a business in Canada and employs Canadians may be eligible, and it only takes one phone call to see if you qualify.
All you have to do is show you did some research to become more competitive in your market. It can be a technological advancement or obstacles you overcame, and the outcome does not have to be successful. You can claim up to 68% of wages, 41% of materials, and 41% of contractor costs, depending on your circumstances and the province you’re in.
Here’s how to get the best claim, with the lowest amount of risk, in the least amount of time:
1. Maximize your claim by having a SR&ED engineering firm work with your accountant to process your claim.
Most accountants will routinely fill out a SR&ED tax form if you ask them to. But there may be a 200% difference between your accountant’s claim and a SR&ED engineer’s claim. And that’s because a SR&ED tax claim is roughly 15% accounting, and 85% technical.
Your accountant knows you and your business very well, but he/she does not have an engineering degree. SR&ED engineering specialists have an engineering background and specialize in writing SR&ED claims.
Where an accountant sees a chair, a SR&ED engineer sees 10 components inside the chair, as well as all the processes and materials behind those components. They uncover technical procedures others might miss. That translates into a larger cheque or tax credit for you, and if you want to maximize your claim, you’ll need that technical edge.
2. Minimize the risk by paying for performance
The SR&ED engineering firm collects a percentage of your claim only if your claim is successful. You invest the time to initiate the claim, and they absorb the financial risk. This reduces your out-of-pocket cost to zero.
3. Save time by working with professionals who have a consistently high rate of success.
Engage a SR&ED engineer who specializes in your specific industry and has over 10 years engineering experience in the field. Avoid wasting time getting someone up to speed on your technology and other processes.
You are restricted to 1400 words to succinctly capture all of your technical procedures inside the SR&ED tax claims form. A SR&ED engineer has mastered the technical descriptions that Revenue Canada approves of. You avoid audits and expensive challenges to your claim.
SR&ED engineering firms have an extensive knowledge-base of previous claims to benchmark against. This ensures your claim is on par with other successful claims made in your industry.
And finally, experienced SR&ED engineers have a failure rate of less than 1%. You can be confident the time spent in the SR&ED process will provide you with an excellent return on investment.
So wake up to what your competitors are doing.
Take advantage of the more than $4 billion the government provides in SR&ED tax claims to businesses like yours every year.
Use the simple strategy above to get your share. You can go to a site like www.sredsimple.com to ask questions about the SR&ED program, or to find out if you qualify.
Take Advantage of SR&ED, and Do Some Research Every Day
There are some very generous research and development tax credits in Canada, and you should be taking advantage of them.
The Canadian government allows $4 billion in tax credits every year to companies (and other taxpayers, too) who perform research and development in order to become more competitive. The Program is called theScientific Research and Experimental Development (SR&ED) Tax Incentive Program (also referred to as: SRED, SR and ED)
The credit may be refundable. This means that in the right circumstantces if you have no revenue and/or are not profitable, you STILL get the tax credit back in cash. With a little effort the rewards for doing some “r & d” can be excellent. Keep in mind the credit is not always refundable though, and is only for Canadian-controlled private corporations (CCPCs). Foreign owned, public companies are not eligible for a refundable tax credit.
How Much Can You Get?
Canadian-controlled private corporations (CCPCs) with less than $200,000 in taxable income can receive an investment tax credit (or ITC) of 35% of SR&ED expenditures, to a max of $2 million.
Public Canadian corporations, foreign controlled corporations, and private proprietorships can receive an investment tax credit of 20% of qualifying SR&ED expenditures. So even if you do not have employees or an incorporated company, you can apply.
You get up to $.35 back in either CASH or a tax credit from the federal government for every dollar spent on research.
As well, you can claim an overhead “proxy” which amounts to 65% of your direct cost.
Each province also provides a percentage of the SRED tax credit. This usually amounts to another 10% you can claim (depending on the province, some rates are lower, some are higher).
So how do you apply for SRED (or SR&ED)?
Any taxpayer can apply – companies or individuals. Using form CCRA Form T661 as part of your annual tax filing, i.e. submitted with the T2 or T1 income tax return.
AND you can file SR&ED claims as late as 18 months after your filing due date for the year in which the SR&ED expenditure was incurred. You don’t need a lab, or a PhD, or research facililities…just proof and documentation showing you tried something new, and that there was a technological challenge. (Off the shelf solutions are not acceptable by CRA – you must show you had to innovate your way out of a problem instead).
One of the best ways to get the maximum claim, in the shortest time, with the least amount of risk (sound good?) is to engage a SRED engineering specialist firm. They will examine your claim, get the most for your money, and save you time getting someone who is unfamiliar with engineering and technology (like your accountant, for instance) up to speed.
Posted in R & D Tax Credits by .
Here’s a formula for getting the best SR&ED return in the least amount of time, with minimum risk!
You could kill yourself trying to figure out the best way to make your research and development SR&ED tax claim. Not only does the CRA have thousands of pages of eligibility guidelines, but R & D can often be confused with activities that are either “not applicable” or “applicable but not apparent”.
Save yourself some time and headache by having your first three to four years of R and D SR&ED claims managed by a SR&ED engineering specialist. This is someone who has been doing SRED claims for many years, on a full time basis. They have both an engineering degree AND at least 10 years engineering experience in the field, and they have the research and development tax credit system down to a science.
Your claim for SR&ED research tax credits can be farmed out to someone on a contingency basis, which means they will only earn a percentage of your claim if the claim is successful. You get the benefit of having an expert work on your behalf, without paying anything out of pocket.
Now granted, you are sharing part of the tax credit, and will be paying the SRED engineer a fee once you receive your cheque from CRA. This does work in your favour though, because the SR&ED engineer can sometimes get over 200% more for your claim than your accountant or other tax credit consultant.
As well, many business people complain about getting their accounting firm up to speed on their technology and technological processes. This is very time consuming and could be costly, since your claim is very dependent on the technical language used in the t661 claims form. Sometimes firms end up spending as much on defending their claim than the actual claim is worth! So don’t say you haven’t been warned.
Once the SR&ED engineer gets involved with your claims, over time you can wean yourself away from using the expert and start making the claims yourself. After 3 -4 years having the SRED engineer transferring the mindset and methodology of what he is doing, you or your staff are going to have the skills necessary to do it independently.
Posted in SR&ED by .
There’s a big difference between what your accountant sees and what a SR&ED engineering specialist would see.
For example, an accountant would look at something you had produced and quantify according to his/her knowledge of that particular thing. Let’s use an example of a specific component of something that is part of a larger process or product.
The accountant will see the component for what it is, and value it based on the parameters of the costs associated with it.
The SR&ED engineering specialist will look at that component and immediately recognize the opportunity to break that component down into many processes/procedures.
So your accountant may quantify the component as 1 process and one set of materials. The SR&ED engineer will take the same component and split it into 10 different (and complex) processes and components.
In the end the more processes and materials exposed, analyzed, and documented, the more materials used, hours spent, and the higher the claim.
Some SR&ED engineering specialists are increasing their clients claims by as much as 200% over what the accountant has claimed
The reason for this is that every SR&ED claim is 15% accounting, and 85% technical. So it’s a good idea to supplement your accountant’s knowledge with someone who has done the technical part for other companies like yours many times and been successful.
And it pays to engage someone who can “see” the opportunities in every bit of research and development you do.
So keep your accountant on board with all of your SR&ED activities, obviously he/she knows your business best. But have a SR&ED engineering specialist manage the technical part of the claim. That way you will benefit with the expertise of both.
Posted in SR&ED by .
Mar 10
17
SR&ED Tax Credit Program
I’m going to show how you can not only receive a large cheque from Revenue Canada’s SR&ED Tax Credit Program… but also how you don’t need a research department to get substantial cash-back tax credits each and every year.
Any industry is eligible. Whether you’re a 3-man machine shop in British Columbia or a large furniture manufacturer in Nova Scotia – if you tried something new, you operate in Canada and employ Canadians, you may be eligible for the SR&ED Program.
Now it does have to be a technological advance, or some technological obstacles overcome. We’re not talking about a new brochure or a sales trip to Hong Kong! And, of course, a systematic way of recording what you did is part of it too.
And it only takes one conversation with the right person to find out if you have a valid claim.
No matter what industry you are in, you can:
Qualify for a cash refund, which means you receive a cheque in the mail from Revenue Canada in 3 – 6 months.
For instance, in Ontario you can recover up to 68% percentage of salaries, 41% of contract payments and equipment leases, and 41% of contractor costs, offsetting the cost of any research activity you may be doing
Increase your R&D budget (knowing you will get almost half of it back), allowing you to become more competitive.
Have a SR&ED engineering specialist who is knowledgeable about your industry analyse your situation and identify activities, expenses, and processes that are often overlooked, ensuring you are getting the maximum return from your claim
Avoid any financial risk, since contingency-based compensation only happens if your claim is successful.
And if necessary, have your unused tax credits carried back 3 years or forward 20 years, giving you the benefit of tax credits for years to come.
So what are the biggest risks you have in taking action and applying for a SR&ED claim today?
One of the biggest risks is the time you spend to initiate a claim. A SR&ED claim is roughly 85% technical and only 15% accounting. You have only 1400 words in the SR&ED application to get it right, and this is where most unsuccessful claims fail.
To maximize the amount of the tax credit you get each and every year, and to ensure the time spent on your claim is worthwhile, I recommend you hire a SR&ED engineer who:
1. has an engineering degree and engineering background
2. has 10 or more years engineering experience in the field
3. has a knowledge base of SR&ED claims of your industry to benchmark your claim against
4. and has a success rate of over 98% doing many years of SR&ED claims.
SR&ED Consulting is an unregulated business – and it seems like everyone is selling SR&ED Consulting as a service these days! Here’s what you need to avoid:
1. A SR&ED consultant who has no engineering background, and has to spend many valuable hours getting up-to-speed on your work-flow and technology
2. Someone who does not have a deep knowledge base of industry-related SR&ED claims to draw from
3. Large accounting firms that have SR&ED claims as an add-on service, rather than as a core area of expertise.
The other risk to you is financial, meaning you may miss out on your share of the 4 billion dollars the Federal and Provincial governments pay out in SR&ED tax credits each and every year to companies much like yours.
SR&ED claims as a service is contingency-based, meaning your consulting SR&ED expert only gets paid if your claim with Canada Revenue is successful. Fees average from 20 – 30% of the full claim.
And since your SR&ED engineering team only gets paid if your SR&ED claim is successful, you haven’t much to lose
©2010 Tim Robertson
Posted in SR&ED by .
