Claimants paying 30% in fees – meaning that out of $4 billion of SR&ED tax credits paid out, consultants received $1.3 billion! A recent article in the Globe and Mail is considered to be a bit sensationalistic around the subject of SR&ED consultants and the fees they are paid. Here is a bit of background [...]
Claimants paying 30% in fees – meaning that out of $4 billion of SR&ED tax credits paid out, consultants received $1.3 billion!
A recent article in the Globe and Mail is considered to be a bit sensationalistic around the subject of SR&ED consultants and the fees they are paid. Here is a bit of background on how the business works, and what clients actually pay.
In some instances a claimant my pay 30%, but most of the time clients pay anywhere from 5 – 15% if they do some of the work internally. Larger clients with substantial claims would not be paying 30%, just because of the competition in this business alone. The amount that goes to clients overall is north of 90%.
The Business Development Bank of Canada, which is a government organization, has been known to charge businesses up to 50% of their anticipated SR&ED refund. So obviously consultants are providing competitive pricing for this type of service.
Sometimes clients pay a higher rate just because of all the work involved. The CRA requires the same amount of documentation regardless of how large a claim is, and this creates a fixed amount of time to produce and substantiate all the paperwork – even if the claim is small. As a rule, the larger the claim, the less a client will pay, and most consultants have a sliding scale that reflects what the percentage will be for the amount of work involved. And as mentioned, in a competitive market, the savvy client will shop around for the best rate.
Hopefully this type of article does not dissuade clients from seeking professional help with their claims. CRA reviewers can be hard to work with, and no one wants an audit or a challenged claim. As one consultant has been quoted as saying: “I can assure you that should the government decide to impair or eliminate the program, R&D jobs will move off-shore faster than you can say shareholder value.”
In some instances a claimant my pay 30%, but most of the time clients pay anywhere from 5 – 15% if they do some of the work internally. Larger clients with substantial claims would not be paying 30%, just because of the competition in this business alone. The amount that goes to clients overall is north of 90%.
The Business Development Bank of Canada, which is a government organization, has been known to charge businesses up to 50% of their anticipated SR&ED refund. So obviously consultants are providing competitive pricing for this type of service.
Sometimes clients pay a higher rate just because of all the work involved. The CRA requires the same amount of documentation regardless of how large a claim is, and this creates a fixed amount of time to produce and substantiate all the paperwork – even if the claim is small. As a rule, the larger the claim, the less a client will pay, and most consultants have a sliding scale that reflects what the percentage will be for the amount of work involved. And as mentioned, in a competitive market, the savvy client will shop around for the best rate.
As one consultant has been quoted as saying: “I can assure you that should the government decide to impair or eliminate the program, R&D jobs will move off-shore faster than you can say shareholder value.”
Most accountants will routinely fill out a SR&ED tax form if you ask them to. But there may be a +100% 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 [...]
Most accountants will routinely fill out a SR&ED tax form if you ask them to. But there may be a +100% 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.
The SR&ED (Scientific Research & Experimental Development) Tax Credit Program can benefit software and IT companies. It’s a remarkable incentive program for business owners, and every year the Canadian government provides over $4 Billion dollars in tax credits to companies that make the effort to apply for it. The program reimburses companies for what is officially [...]
The SR&ED (Scientific Research & Experimental Development) Tax Credit Program can benefit software and IT companies. It’s a remarkable incentive program for business owners, and every year the Canadian government provides over $4 Billion dollars in tax credits 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 SR&ED engineer. Although your accountant may have some experience with SR&ED tax credits, 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%.
SR&ED has been around for 20 years, and the purpose of the program is to encourage innovation and help Canadian businesses grow. Your competitors are probably taking advantage of it – it might be time to take the initiative and see what it can do for your organization.
What types of activities are eligible for SR&ED?
These are the activities the Canada Revenue Agency says 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 could be eligible:
Making a software program more efficient
Re-engineering
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.
How much can you get?
You can claim up to 68% of wages, 41% of materials, and 41% of contractor costs, depending on your circumstances and the province you are in. This can include labour, materials, and equipment. The tax refund 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.
How is the claim made?
The SR&ED tax claim is made by filling out the proper tax forms using the technical languaging the CRA approves of (which is why you should hire an SR&ED Engineer to assist your accountant with it). You only have 1500 words to make the case for a tax refund, and 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 engage a SR&ED Engineer to help you document what was done and the costs that were related to it.
Good SR&ED Engineers have a failure rate of less that 1%, and are compensated for performance. Because they are confident with their success rate, it only takes a phone call to determine whether the competitive research and testing you have done is eligible.
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 [...]
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 you can 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 this strategy. 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 cash refund of $30,000 – $2,000,000 worth something to the yearly cashflow of your business? If you [...]
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 cash refund of $30,000 – $2,000,000 worth something to the yearly cashflow of your business? If you have a SR&ED Engineer look at your claim, their may be a lot less time commitment than you think.
2. “We don’t do R&D, so we don’t qualify”
Since common activities either in the shop or other industrial settings 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 did not pay taxes.
5.“The work we did is not that new.”
The eligible work only has to be new to your organization, even if advanced processes exist elsewhere (ie.with your competitor). If you experienced technical challenges and tried to resolve those challenges systematically, you may be 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 solving 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, reduce your risk by having a SR&ED engineer help you and your accountant maximize your claim and 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 SR&ED engineer who has done this many times before — or you may have to defend your claim, spending time and money that could be allocated elsewhere. Question about [...]
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 SR&ED engineer who has done this many times before — 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 [...]
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 Engineer 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 +100% 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 Engineer 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 Engineers 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 this simple strategy above to get your share.
Take Advantage of SR&ED, and Put Research Into Your Budget There are some very generous research and development tax credits in Canada, and you should be taking advantage of them. The Canadian government allows innovation tax credits every year to Canadian companies (and Canadian taxpayers) who perform research and development in order to become more [...]
Take Advantage of SR&ED, and Put Research Into Your Budget
There are some very generous research and development tax credits in Canada, and you should be taking advantage of them.
The Canadian government allows innovation tax credits every year to Canadian companies (and Canadian taxpayers) who perform research and development in order to become more competitive. The Program is called the Scientific 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 circumstances 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 claiming “r & d” can be substantial. Keep in mind the credit is not always refundable though, and is only for Canadian-controlled private corporations (CCPCs). Foreign owned, or public companies are not eligible for a refundable tax credit, but still get the benefit of tax credits alone.
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. Sole proprietorships are eligible as well.
Public Canadian corporations, foreign controlled corporations, and private proprietorships can receive an investment tax credit of 20% of qualifying SR&ED expenditures.
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 Canadian 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.
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 is to engage a SR&ED Engineer. A SR&ED tax claim is 15% accounting and 85% technical, so you need that technical edge to maximize your claim. You also save you time getting someone who is unfamiliar with your engineering processes and technology up to speed, as qualified SR&ED Engineers have over 10 years experience in the field.
Here’s a formula for getting the best SR&ED return in the least amount of time (and the least amount of minimum risk): Your research and development SR&ED tax claim may eat up a lot of resources. Not only does the CRA have thousands of pages of eligibility guidelines, but R & D can often be [...]
Here’s a formula for getting the best SR&ED return in the least amount of time (and the least amount of minimum risk):
Your research and development SR&ED tax claim may eat up a lot of resources. 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”.
Have your first three to four years of R and D SR&ED claims managed by a SR&ED engineer. This is someone who has been doing SRED claims for many years, filing many claims in the process. Someone who has both an engineering degree and at least 10 years engineering experience in the field. They should 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 any out-0f-pocket fees or expenses.
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 up to 250% more for your claim than your current advisor or accountant.
There are several reasons for this. The SR&ED application form is 15% accounting, and 85% technical. Where an accountant may see a chair, a SR&ED consultant sees all of the components inside the chair, as well as all of the processes and materials that make up those components. You want someone with that technical expertise to write your claim.
Many business managers complain about getting their accounting firm or SR&ED consultant up to speed on their technology or technological processes. This can be time consuming and costly. SR&ED Engineers with many years experience in the field will be able to leverage that experience and expertise to your benefit.
Your claim is very dependent on the technical language used in the t661 claims form. Some firms end up spending as much on defending their claim than the actual claim is worth. It’s best to have a SR&ED Engineer assist your accounting team with your claim – and preferably with a SR&ED Engineering firm that has filed hundreds of claims successfully.
Once the SR&ED engineer gets involved with your claims, 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.
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 [...]
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 engineers are increasing their clients claims by as much as 250% 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 aspect of a claim for other companies like yours.
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 engineer manage the technical part of the claim. That way you will benefit with the expertise of both.
