$3 Billion SR&ED Program to be Cut by 50% in 2020 and 2021
The SR&ED Program provides more than $3 billion in tax incentives to over 20,000 claimants annually, making it the single largest federal program that supports business R&D in Canada. (CRA, 2021) Companies across the country rely on SR&ED tax credits to offset up to 70% of eligible salary expenditures as well as a significant percentage of materials and subcontractors involved in qualifying business activities.
Despite being officially regarded as a program to finance experimental development, the actual purpose that the SR&ED program fulfills is in creating and maintaining high paying technical jobs in Canada. Because Canadian businesses can offset up to 70% of qualifying salary expenditures, it disincentivizes outsourcing, and provides strong incentive to hire more people.
A common misconception about SR&ED is that it is only for businesses operating in extreme cutting-edge areas, however this could not be further from the truth. “Hardcore” SR&ED businesses do exist, such as Trexo Robotics which is a G6 Consulting client who develops robotic technology to help children with disabilities walk. In practice, however, the vast majority of SR&ED is known within the industry as commercial SR&ED. For example, a manufacturing company that needs to develop a special type of rope for a project, or a software company doing novel development would both qualify for SR&ED. Even wineries developing a new grape variant qualify for SR&ED. The program is so robust and widespread that any technology business in Canada that has not looked into the program is doing themselves a disservice.[G6 Consulting offers free consultations to businesses in which one of our experts will discuss options with you in respect to SR&ED. Consultations can be booked here (https://www.g6consulting.ca/contact/)]
As well-known, and widespread, as this program is, many people do not know that the SR&ED program will be cut in half in 2020 and 2021. The Canadian Emergency Wage Subsidy (CEWS) was born amid the Covid-19 pandemic as a way to help offset losses suffered by businesses and to allow them to keep workers employed. Because of the CRA’s designation that this CEWS will be categorised as “government assistance” explained here, it conflicts with the longstanding SR&ED program. The CRA has instructed businesses to deduct the Canadian Emergency Wage Subsidy from their SR&ED as to ensure that there is no overlap in monies received for SR&ED eligible employees for which the wage subsidy was also received. Due to the fact that CEWS is on track to amount to $84 Billion, a simple deduction from the $3 Billion SR&ED program decimates a company’s claim.
Of course, just because an employee eligible for the SR&ED program was also claimed for CEWS, does not mean that the company is “double dipping” by claiming them both. Take the following example:
Company X has 500 employees, 50 of which do work that qualifies for SR&ED, therefore, yearly, the Company X receives from the government, 70% of their salary expenditure on the 50 employees that do SR&ED eligible work.
Company X applies for the first two periods of the Canadian Emergency Wage Subsidy, receiving up to $6400 ($3800×2) for each of their 500 employees.
Because Company X has no way to manually disentangle the 50 SR&ED eligible employees, and only deduct the first $3800 in salary expenditure, for only 2 out of 12 months in the year, they are forced to make a bulk deduction.
Company X deducts total CEWS received $3.2 million from $2 million in SR&ED due to be received, therefore losing all SR&ED except for proxy amounts.
This is not the only way, however. G6 Consulting has developed Canada’s first software that programmatically disentangles all SR&ED from CEWS removing the overlap and only the overlap between SR&ED and CEWS monies received. This allows businesses to preserve the bulk of their SR&ED claim and remain fully compliant with CRA rules. Company Y contacted G6 Consulting to gain access to Canada’s first CRA compliant CEWS-SR&ED calculation software.
Similarly, Company Y also has 500 employees, 50 of which do work that qualifies for SR&ED, therefore, yearly, the Company Y receives from the government, 70% of salary expenditure on the 50 employees that do SR&ED eligible work.
Company Y also applies for the first two periods of the Canadian Emergency Wage Subsidy, receiving up to $6400 ($3800×2) for each of their 500 employees.
Because Company Y has access to Canada’s first CEWS-SR&ED calculation software, the SR&ED qualified employees are disentangled from all other employees, the timeline for which the overlap is not present is excluded, and all salary above that compensated for by CEWS constantly remains SR&ED eligible.
Company Y deducts $320 000 in CEWS from $2 million in SR&ED due to be received, therefore preserving the vast majority of their SR&ED claim and remaining fully compliant with the CRA.
Of course, none of the simplifications made with these two examples play out in practice. In practice a company has 124 employees that do SR&ED eligible work for between 5% and 95% of their time, and some have salaries above the max CEWS grant, and some don’t. With the G6 CEWS-SR&ED software, this headache is handled for you, and you get back tens to hundreds of thousands to even millions on your SR&ED claim as a bonus. Contact us today.