Can I deduct less than my full CEWS amount received from my 2020 SRED? In a word, yes.
The CRA announced June 19, 2020 that CEWS would indeed be considered government assistance and would reduce SRED expenses. Here’s the complete announcement, just so you don’t have to click over:
[2020-06-19] “The Canada Emergency Wage Subsidy and the 10% Temporary Wage Subsidy for Employers are considered government assistance. Assistance received under either wage subsidy reduces the amount of expenses eligible for SR&ED investment tax credits and film and media tax credits. Additional information is available in the Canada Emergency Wage Subsidy application guide.”
The CEWS app guide is interesting reading, but I’ll save you another click. No mention of SR&ED over there whatsoever.
Gee! This doesn’t seem to be a lot to go on, regarding how, where, when, why, how much, CEWS I need to deduct from my SRED!?
Good observation. If you phone your local CRA SRED office, they’ll tell you to deduct a “reasonable” amount of CEWS from your SRED expenditures.
Here we can rely on a long history of programs which were and are deemed to be government assistance and we know what “reasonable” is based on how amounts under those programs were and weren’t deducted. Yay! This feels like progress!
IRAP. IRAP is a longtime federal grant program which funds hardcore/unique hard science-oriented firms. IRAP is a relatively small program, $200-300M per year. SRED is 10x that at $3B federal plus provincial overlays. Not that we’re counting, but CEWS is a $55B mammoth in only 11 claiming periods in 2020. So just at 40,000 ft you can see that deducting IRAP from your SRED is a knife cut. Deducting CEWS? Your house just fell on you.
The key principle when we’re deducting “reasonable’ amounts of government assistance from our SRED claim is “overlap”. Overlap can also be thought of as “double-dipping”. The government doesn’t want to pay the same individual within a company twice with government assistance. Because SRED is filed after the year with your business taxes, it’s the one that gets ground down by IRAP, CEWS, etc., which are paid out during the year.
So let’s consider overlap between IRAP and SRED. IRAP and SRED both pay 8 scientists within a company incentive money. That’s clearly overlap or double dipping and the sred expenditures for those 8 scientists must be reduced by their IRAP receipts. But hold on. IRAP will sometimes pay for business development and even marketing headcount. Those people and activities are clearly outside the scope of SRED funding. So company X wouldn’t reduce its SRED expenditures by any of those BD or marketing $, because there’s clearly no overlap.
Timing of expenditures. Receiving government assistance in different periods can de-conflict government assistance payments and lead to no overlap (ie no SRED payback required). Let’s look at an example. Consider 2 identical companies. Each has performed one SRED project in the last 3 years, 50 engineers on a skunkworks prototyping exercise, 100% SRED engaged for Q4 of 2019. Each identical company receives CEWS period 1 – 4 payments from Mar 15 to July 4, 2020. Lucky Company A has a Dec 31 YE. They would not consider deducting CEWS from their SRED! Heck, the two forms of government assistance happened in different tax years! Company B isn’t so lucky. They have a tax year end of July 31. They have a big SRED claim in Q2 and huge CEWS receipts in Q3 and Q4. Chances are they are heading for a filing where their 2020 SRED is ground down by 65%. Now clearly two identical companies should be treated the same by the tax system regardless of arbitrary YE dates. So this example shows us that timing of payments can be a valid way of de-overlapping government assistance payments too.
There are other ways of de-overlapping government assistance. One last example here. The CEWS maximum period payment to an employee is $3800 per period. Call that a month. (The G6 CEWS-SRED calculator carefullly allocates CEWS assistance from a given CEWS period into its proper month. Just one of its many skills it performs to get to your correct, minimum CEWS deduction)
So let’s circle back to the original question posed at the top of this post.
Can I deduct less than my full CEWS amount received from my 2020 SRED? Absolutely! To untangle real-world CEWS and SRED scenarios, all you need is Canada’s first CEWS-SRED calculator. Available now from G6 Consulting.