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.