CRA HQ in Ottawa

No, Your Big 4 Accountant Can’t Fix your SR&ED Problem as it Relates to the Canadian Emergency Wage Subsidy

Post by Michael Austin, G6 Marketing Manager

 

No, Your Big 4 Accountant Can’t Fix your SR&ED Problem as it Relates to the Canadian Emergency Wage Subsidy (CEWS)

The topic of big accounting firms and entrusting them with your companies SR&ED claim is a widely misunderstood concept. Paying a premium to a big accounting firm in order to have them handle everything to do with tax and tax credits, intuitively leads one to believe they are getting the best service. This is categorically false, at least as it relates to the SR&ED tax credit program. Firstly, accounting firms inevitably focus on accounting aspects of your SR&ED claim, a claim that, as far as the CRA is concerned, receives merit almost solely based on the technical write-up part of your SR&ED claim, not the accounting specifics. Secondly, although you may be dealing with a senior executive in your communication, the personnel that actually works on your SR&ED claim is at the bottom of the corporate ladder at a Big 4 firm. Oh, and those people actually working on your claim will be DIFFERENT next tax season.  Count on it.  You get to train new people in how your SRED works! Finally, perhaps most counter-intuitively, because so many big 4 claims have been sub-par your SR&ED claim is more likely to be examined for audit when prepared by a Big 4 firm than a dedicated SR&ED consulting firm.

As Canadian businesses become aware of the colossal problem that they will be faced with for their next two to three SR&ED claims due to monies received from the Canadian Emergency Wage Subsidy, many are under the false assumption that the expensive big 4 firm that handles their SR&ED will handle everything appropriately and optimally for them. If one considers unnecessarily grinding down over half of the SR&ED claim to be optimal, then this fallacy would hold some water. However, it can be safely said that companies are not in the business of missing out on tens to hundreds of thousands of dollars in tax credits to which they are entitled.

When the Canadian Emergency Wage Subsidy was officially deemed “government assistance”, the CRA compelled all of the 20 000 Canadian businesses that receive SR&ED tax credits to ensure that there would be no overlap in salaries claimed for the two programs.

The common sentiment has been that this will result in a 65% deduction of SR&ED claims. The logic is that businesses will, with no way to manually disentangle CEWS monies received from every single employee whose salary expenditure also qualifies for SR&ED credits, simply subtract ALL CEWS received from ALL SR&ED to be received due to salary cost, resulting in only the proxy amounts of SR&ED to remain. This is the practice that any big 4 accounting firm will perform, leaving you in good standing with the CRA, but tens to hundreds of thousands of dollars (or even millions) short of what you are entitled to.

G6 Consulting has the first, and so far only, CRA-compliant software in Canada that automatically removes the overlap and only the overlap of SR&ED and CEWS monies received, by only deducting CEWS from SR&ED when there is tangible overlap. This results in an extraordinary difference by allowing businesses to only lose 10% instead of 65% of their SR&ED claim. Here are some case studies that show the impact of the calculator (Link – G6 CEWS-SR&ED Case Studies) Big 4 accounting companies will never develop this software because SR&ED is an afterthought. At G6 Consulting Inc, SR&ED is the only thing we do.  We live by our credo: “Nobody outworks G6, in service to the customer.”

The G6 CEWS-SR&ED Calculator developed by experts of the industry, is free to test, and a license can be obtained for any business for just 25% of the savings that the software will give them over the brute force subtraction method of decimating ones SR&ED claim.

Remember, Big 4 Accountant Can’t Fix your SR&ED claim!  Call G6.

DO NOT GRIND MY SRED!

ONLY G6 CEWS-SRED software can save 80% of my FY2020 and FY2021 SRED Clawback from CEWS? IS THAT LEGAL?!

ONLY G6 CEWS-SRED software will save 80% of my FY2020 and FY2021 SRED Clawback from CEWS?

IS THAT LEGAL?!

YES, of course, it is 100% legal.

What the CEW-SRED software does, to save your SRED from decimation, follows decades-established principles regarding the manner in which government assistance reduces, and more to the point, does not reduce, your SRED expenditures.

Colloquially, the principle of government assistance with respect to SRED states that we must eliminate all “double dipping” of a given benefit from our SRED expenditures.  The minimum reasonable and legal deduction of CEWS from SRED expenditures “disentangles” and removes only the CEWS and SRED “double-dip” or overlap.

What does disentangling the “overlap-only” look like?  Let’s check out some examples.

IRAP

IRAP has been around since 1962. Longer than SRED, in fact, which is a relative newcomer, debuting in 1986.  IRAP is the prototypical example of government assistance which must be deducted from your SRED expenditures.  Deducting the proper amount of IRAP doesn’t require a calculator or sophisticated software to accomplish.  Why not?  IRAP is tightly aligned with SRED subsidies.  IRAP subsidizes key technical researchers, usually at a rate of up to 75% of their annual salary.  These hard-core researchers are, as a general rule, claimed in a company’s SRED submission at 100% of their salary.  Therefore, in most cases, the correct deduction of IRAP from SRED expenditures is 100%.  See? No need for Canada’s first de-duplicating software.

But. IRAP is not always 100% deducted from SRED expenditures. In some cases, IRAP will fund BD personnel, and even marketing and sales folk.  None of these personnel can be claimed as SRED personnel.  So you can see that none of these BD/mktg/sales IRAP subsidy amounts should be deducted from your SRED.  There’s no overlap!

Again, this IRAP-SRED scenario is simple to disentangle once you know the principles at work.  No rocket-science software from G6 required!

2 identical companies with different fiscal year ends

Imagine 2 identical Canadian companies.

500 employees.

450 mgmt, sales, operations, factory employees.

50 engineers.

Both companies have the entire engineering project working flat-out on a SRED project for Q4, 2019.  No SRED materials, no subcontractors.

So SRED expenditures are :

SRED Salary exp =  $120K salary/yr/engineer x 50 engineers x 1/4 year

SRED Salary exp = $1,500,000

Let’s go to the G6 SRED calculator!  (Download it at g6consulting.ca/sred-calculator/)

Plug in our figures.

OK!  SRED credits of $983K!

Now, here comes the strange part. Let’s say that the SRED sprint in Q4 2019 is the only SRED project the identical companies have done since 2017.  Let’s say further that the companies received CEWS only during claiming period 1, March 15 – April 19/20, for a very typical-for-that-size firm, $1.55M.  OK.

Company A has a year end of Dec 31, 2019.  Everything is great! No SRED clawback! Heck, the SRED and the CEWS weren’t even in the same fiscal year!

Now Consider Identical Company B.  They aren’t so lucky!

Poor Identical Company B has a year end of April 30, 2020.

Here’s what their SRED looks like for 2020 (without g6 CEWS-SRED software!)

$349K.  Down big from the $983K it would have been pre-pandemic!

Now, clearly, Identical Company A and Identical Company B owe the same taxes and “should” receive the same SRED credits. Everybody knows (see Geico, below) that your arbitrary choice of fiscal year end shouldn’t change your tax or credits posture with the CRA.  But the above scenario is real.  It’s happening with hundreds and soon thousands of companies across Canada as they begin to file their first pandemic-affected T2.

Company B really, really needs to call G6!  They stand to save $634K from SRED clawback. Wow!

ITC – OITC – ORDTC Government Assistance Merry-Go-Round

If you’re looking for logic, stay away from the Income Tax Act.  That’s a bit like Geico saving 15% on your car insurance.  Everybody knows that!

Here’s a great case in point.  Most people who file SRED don’t realize it, but every time they file a claim, they are seeing government assistance reductions in action! What! Where?

For some long forgotten, but certainly silly, reasons, some, but not all, of the SRED credits are considered to be government assistance against each other.  SRED clawback against itself.  Highly circular! (My head hurts too.)  Follow along with me friends.  OITC grinds ITC and ORDTC. But ORDTC doesn’t grind OITC, just ITC.  OK, I’ll stop.  If YOU want to see government assistance grinding in action, download the G6 SRED calculator.  You can toggle ORDTC credits on or off.  Some companies that don’t expect to pay taxes for several years will turn off receipt of their ORDTC credits, which as we know by now if we’ve been following the g6 blog closely, are non-refundable.  So as you toggle ORDTC on and off in the calulator, you’ll see that total cash credits go up as total credits received go down, and vice versa. Government assistance grinding before your very eyes!

Smokey the Bear and SR&ED Audit Defense

Thank You for Self-Filing Your 2020 SRED!*

This post is titled “Thank You for Self-Filing Your 2020 SRED!*”  I’d give it a sub-title, if I knew how to do it in WordPress: “Hey! Help! Who do I call for SR&ED Audit Defense?!”

G6 has a thriving niche vertical in SR&ED audit defense.  SRED audit defense is a nice change of pace for a few reasons.  First of all, we didn’t prepare the claim, so we don’t need to feel guilty about landing the customer in the soup.  Two, we get paid upfront, a flat fee in most cases.  This is a welcome departure from our normal contingency billing.  Third, we need to participate in some audits to get G2 on the government’s current posture regarding reviews, strictness, and points of emphasis. This sort of valuable colour is simply not available at What’s New in SRED.

So we do thank self-filers, folks who file SRED with the big accounting companies, people who got a “deal” on their SRED for 14%, and the ill-informed, who generally file with unvetted companies, losers, or people who “boast” about their SR&ED “AI”.  These unfortunates are our future SR&ED audit defense valued customers.  Thank you.

We participated in a SRED audit defense December 28. Imagine that, the government scheduling work for December 28.  The military term for that would be, “Congrats, you have been invited to a Foxtrot Uniform meeting.  We helped the customer out.  That is how we roll.

The government will tell you in any general info session, audit, or FTCAS, that they are reviewing your claim for systematic work.  Systematic investigation is a cornerstone of the scientific method. Yet, how did you pick your SR&ED provider? Did you do your homework? Did you attempt to secure the services of the SRED thought leader? The customer service leader? Did you shop around? Ask some tough questions?

G6 is not here to MAXIMIZE your SRED claim.  We leave that to flim-flam artists.  What does John Wooden teach us?  The great man led the UCLA Bruins to ten NCAA men’s basketball national championships in a 12-year period.  7 of those championships were in a row!  The bottom left cornerstone of John’s iconic, 15 block,  Pyramid of Success, instructs us:  “Success travels in the company of very hard work.  There is no trick. No easy way.”  No, G6 won’t maximize your 20XX SRED claim.  We strive to maximize your claim 5 years from now.  10 years from now.  In our considered view, THAT is John Wooden-style success for your company’s vital R&D funding.

*The title of this blog post is clickbait.  It is sarcastic.  Let me be entirely clear; I didn’t mean it.  I wish ill-fortune on no man.  For 99 people out of 100, I firmly believe that filing your own SR&ED claim is penny-wise and pound-foolish.  What is 14% of zero? Do you file your own corporate taxes? I can assure you that your SR&ED is 5x more complicated and more nuanced than your general taxes.  Where is my evidence?  It wasn’t that many years ago that the CRA employed ONLY PhD’s to conduct SR&ED technical reviews.  If you encounter an accounting professor/PhD conducting your next corporate tax, payroll or HST audit (see above re no ill will…) I will eat my hat.

 

3x CEWS-SRED calculator Case Studies

3x CEWS-SRED Calculator Savings Case Studies

3x CEWS-SRED Calculator Savings Case Studies

 

Here are 3 real word examples of the magnitude of the savings available with the G6 CEWS-SRED calculator.

These case studies consider three different customer profiles:

(1) A large High Tech Manufacturer with 6,000 headcount in Canada and 1,500 researchers.

(2) A large CCPC Engineering and Manufacturing firm with 400 total personnel and 40 SR&ED contributors.

(3) A Nine Headcount Software start-up with six SRED practitioners.

 

Case Study #1:

 

 

 

Case Study #2:

 

 

 

Case Study #3:

 

 

Godzilla eats Van

CEWS EATS 2020, ’21, ’22 SR&ED AND BRITISH COLUMBIA!

Yes friends, this is the headline:

“CEWS EATS 2020, ’21, ’22 SR&ED AND BRITISH COLUMBIA”

So…what the heck?  Why am I the only person, really red in the face, waving, shouting loudly, and bouncing up and down?!

I see my wife looking at me funny. Ok, fine, it might not be the first time in history I’ve bounced up and down and shouted… Whether attending sporting events or checking the latest handy CEWS scoreboard, updated at least bi-weekly by the feds, my reaction is largely the same.

Back to the topic at hand,

The entire British Columbia provincial budget for 2020 is $60.058B.  The aforementioned CEWS scoreboard, as of December 24, 2020 is already at 55.42 billion!

 

CEWS scoreboard. Current reading as of Dec 20/20: $55.42B

$55.42 billion!  So, by this week’s update, or at the latest the January 18/21 update, CEWS will have eaten the entire British Columbia Fiscal Year 2020 provincial budget!

 

 

Half of the 3 billion annual SR&ED claims is a rounding error. But that rounding error could be tens to hundreds of thousands of dollars for your business. G6 Consulting has released Canada’s first CEWS-SRED calculator.  We can’t save Howe Street.  But we CAN save your 2020 (and 2021+) SRED claims.  Call us.

Uncle Sam

Have You Filed 2020 SRED? Received CEWS? You Have MisFiled! Call g6 for ‘audit-proofing!”

CEWS-SRED misfiling.  This post is particularly aimed at corporations with March to June year ends who have already filed a 2020 T2 with both CEWS and SRED.  Guess what? You’ve misfiled.

Here’s a front page headline from the Globe and Mail Dec 22, 2020:

If you have already filed a 2020 T2 with SRED, and you have received CEWS subsidies this year too?  Guess what?  It’s almost guaranteed you have misfiled.

If you deducted too little (or zero) CEWS from your 2020 SRED, that’s a clear-cut CRA audit red flag.  Call g6 immediately to fix these errors and to “audit-proof” you.
More likely, you OVER-deducted CEWS from your 2020 filed SRED.  This scenario is more fun!  Many companies just take the CRA instructions from June 16, 2020 regarding CEWS receipts and SR&ED eligible expenditures literally.  Here’s the entirety of the instruction to save you a click:
                     “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”
Many companies see this instruction, see their large CEWS receipts for 2020 vs their relatively small 2020 SRED expenditures, and reduced (or plan to reduce) their SRED salary expenditures to zero.  That over-deduction unnecessarily drops your 2020 SRED credits by up to 65%.  Or even worse, companies reduce their entire 2020 SRED expenditures to zero.  Which of course puts your SRED credits received in 2020 to zero.  Don’t do this!  Call g6 immediately to help you recover tens to hundreds of thousands of dollars of SRED credits you are entitled to receive!
G6 Consulting has Canada’s first and best tested CEWS-SRED calculator.  We’ll fix your 2020 SRED filing.  If you haven’t filed your 2020 SRED yet, we’ll ensure that the CEWS deduction it contains is accurate to the dollar.  G6 will maximize your 2020 SRED credits AND make you “audit-proof”.  Win-Win for you!
Canada's First CEWS-SRED calculator

Can I deduct less than the full CEWS amount received from my 2020 SRED?

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.

So….What’s “Reasonable”?!

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.

Download the CEWS-SRED calculator.

Get more background on what the CEWS-SRED calculator does.

 

 

This CEWS spreadsheet needs a CEWS-SRED calculator

Learn about Canada’s first CEWS-SRED Calculator

I’ve been getting questions about a CEWS-SRED calculator from accountants, finance guys and a few owners for several months.  We now (finally) have some really exciting news on this topic!

If you’re one of the four companies in Canada who received no CEWS assistance from the feds during 2020, please stop reading.  Sorry for bugging you!

Still here? Great!  G6 Consulting now has the first publicly available CEWS-SRED calculator in Canada.

Maybe this shouldn’t shock me, but the feds themselves don’t have a CEWS-SRED calculator today.  At least not that they will share with us.

The CRA says you must subtract any CEWS you’ve received in your 2020 fiscal from your 2020 SRED salary expenditures in a “reasonable” fashion.  See the original notice here, in the government’s [2020-06-25] post on the “What’s new – SR&ED Program” site.

Without a calculator, you will be over-deducting CEWS from your SRED claim.  Hundreds of companies with March and April year ends have already done this and it has cost them a lot of lost SRED credits.

So, this calculator gives you your exact scaled CEWS deduction for your 2020 SRED. And it tells you how much you saved by not deducting the entire CEWS you received during your 2020 fiscal.  This may be tens of thousands of dollars in saved SRED credits.

The calculator is simple to use.  Upload your actual CRA CEWS 1-11 period spreadsheets into the calculator, however many periods you received money that overlap your FY.  Select your weekly or bi-weekly CEWS report type. Upload your SRED project costs for FY2020.  (If you have your G6 “Client Costs and Projects” SRED sheet handy, or if I’m helping you, this is one copy and paste).

And that’s it. You have your numbers.

The calculator is available now for download here.  Check back regularly because the calculator is updated frequently to keep up with ongoing CEWS changes (eg the Dec CEWS spreadsheet from the gov’t isn’t final, we’ll soon get a January CEWS sheet, etc. ).  Hopefully we’ll have an automated update notice service soon, but for now send an email to ghills@g6consulting.ca with the subject line: “Keep my g6 CEWS-SRED calculator updated!”.  I’ll get you on a list that will email you when there’s a new calculator download available.  No other spam.  No sales rep will call.

If you received CEWS and you’ve already filed a 2020 SR&ED claim with a March 31st or year end, chances are your SRED credits were reduced incorrectly tens if not hundreds of thousands of dollars!  Don’t despair, call G6 Consulting!  We can easily get your proper SRED credits restored to you using the CEWS-SRED calculator and by making an administrative amendment on your behalf with the CRA.

SR&ED tax treatment

SR&ED Tax treatment

 SR&ED Tax treatment

Are my SR&ED credits taxed? Yes they are.  What is the accounting treatment of my SRED credits? Read on, we’ll cover the tax and accounting treatment for your SRED credits.

SRED federal ITCs are taxed in the year following the year that they were awarded.  Provincial credits are taxed in the year that they were awarded except for the proxy portion of provincial credits which is rolled forward to the following year just like ITCs.

All SRED credits are claimed in arrears, so it is possible that all taxes will be payable on the credits as soon as they are awarded, even though ITC credits are tax-deferred by a year. If you file SRED regularly with your on-time T2 corporate tax filing, the bulk of the taxes owed on your SRED credits will be deferred for a year.

SRED tax treatment is automatically handled for straightforward SRED cases (single province jurisdiction, no complex deferrals) by accounting packages like TaxPrep and TaxCycle.  Two SRED-related areas may not be automatically populated so we will cover them here. First is the transfer of relevant SRED amounts to the T2 Schedule 1.  Second, because some SRED credit taxes are deferred from the current year, and not paid until the following year, it’s important to verify your rollover provisions for certain SRED amounts from the year credits are awarded to the following year.  Generally L380 is the addition of the three SR&ED expense buckets, salary ((no proxy included here, materials and (80% of) subcontracts.

SR&ED Schedule 1 amounts

SR&ED taxes are accounted for primarily by 2 figures transferred from Schedule T661 to the Schedule 1.

First is an addition to the company’s net income on L118, “Scientific research expenditures deducted per financial statements.  The figure added here is L380 from the T661. Note that this figure may be different if the financial statements have already been adjusted for SRED amounts, but that’s well outside our default case. L380 on the T661 is Total current SR&ED expenditures.

The second T661 transfer is a subtraction from net income on the Schedule 1 at L411,  Scientific research expenses claimed in year from form T661.  This amount is comprised of L460 from the T661, Deduction (of pool of eligible SR&ED expenditures) claimed in the year.

These calculations look opaque, but the net effect is to defer the current year ITC amount, the current year provincial credit proxy amount, and to tax the previous year’s ITC amount, if any.

SR&ED Rollover amounts

The last thing to check on to ensure that the SR&ED tax treatment is correct are SR&ED rollover amounts.  These rollover amounts will be zero for first time SRED filers and generally also zero for companies which did not claim SR&ED in the prior fiscal year.

The first and most significant rollover figure is L435 on the T661, SR&ED ITC’s applied and/or refunded in the prior year.  This amount will be L540 from the prior year’s Schedule 31, Investment Tax Credit – Corporations..

The final rollover figure to verify the taxation of the prior year provincial credit proxy amounts.  In Ontario, this is the proxy amounts for the OITC and ORDTC credits. This amount, if applicable is entered on the Schedule 1 on L605/295, xITC related to PPA per ITA 12(1)(x).   This amount is equal to the prior year proxy portion of the provincial tax credits (OITC and ORDTC in Ontario).  To check this figure, go to the prior year Schedule T661. Calculate the difference between L513 provincial government assistance (with proxy) and L429 provincial government assistance (no proxy).

That’s it, you are up to speed on SR&ED tax and accounting treatment!

Go here for an SRED credits calculator.

shop floor sred

Shop Floor SR&ED

Shop floor SR&ED is a class of work which can qualify for SRED credits. The CRA recognizes shop floor SR&ED as a valid use case.  It is referenced in the following excellent reference document on canada.ca, see Section 4.0, SR&ED in a production or manufacturing environment.

SRED does not occur exclusively in labs or research facilities.  SRED can be performed in a customer’s production facilities and on regular manufacturing lines to experiment on ways to overcome a technological obstacle.  By the same token, valid SRED work is not the preserve only of scientists, engineers and dedicated R&D staff.  Valid SRED can be carried out by your regular staff.  This type of work that occurs at a customer’s regular facilities, often by non dedicated R&D personnel, is known generically as shop floor SR&ED.

Properly breaking out SR&ED expenses from regular non-qualifying production costs can be challenging.  One of the key principles for sizing shop floor SRED is that the work claimed must be commensurate with activities required to carry out the experimentation.  So if you are experimenting on a process that involves a batch size, only the expenses associated with the smallest viable batch size from a production feasibility standpoint can be claimed as SRED expenses.  When SRED is carried out in a production facility, the proportion of the production run attributable to SRED must be determined.  This is a complicated area of SRED.  The topic is covered in some detail in a policy paper on canada.ca called SR&ED During Production Runs Policy

Production runs involving SRED must be characterized as either Experimental Production, or as Commercial Production.  The differentiator between the two types of production is the technical risk associated with adverse effects of the SRED experimentation.  If these adverse effects are material, and they are directly related to the experiments being carried out, then the production run is considered Experimental Production.  If these requirements are not met, then the production run is considered to be Commercial Production.  The extent of the costs which can be allocated as SRED expenses are much more limited when the SRED is being performed as part of one or more Commercial Production runs.

Another topic that comes up with shop floor SRED are prototypes.  Some prototyping is straightforward when it’s clear that the sole purpose of developing the prototype is for experimental purposes.  Allocating salary, material and subcontract expenses properly to prototyping activity is clear cut.  Some prototyping activity is considered to be for the development of custom products.  Analagous to commercial production discussed above, SRED may occur when we develop custom products, but the extent of the allowable SRED expenses is more limited.  The treatment of prototypes and custom products for SRED purposes are discussed in a policy paper on canada.ca called SR&ED while Developing an Asset Policy

Check out g6’s SRED calculator here.