deadline

SR&ED claim deadline

What is the SR&ED claim deadline to submit your SRED filing?

Your claim is due 18 months after the end of your fiscal year. If your fiscal year end is Dec 31, you have until June 30 of the year after next to get your claim submitted. If June 30 happens to land on a weekend or holiday, then you have until close of business on the first business day after the holiday to get your claim entered.  For paper claims, “entered” means submitted to the post office with a timestamped record of receipt.

The 18 month deadline is a hard deadline.  If you submit a claim past the deadline it will not be processed.

It’s not a hard deadline, but ideally you want to submit your SR&ED claim with your regular T2 submission.  Your T2 is due 6 months after the end of your fiscal year. This means that you should be targeting this deadline to get your claim submitted.

Part of the evaluation of SRED claims is that the work claimed is performed in a systematic way. An easy way to demonstrate that you are carrying out SR&ED work systematically is to submit your SRED on time with your T2 every year.

Once your claim is properly submitted, the government has a service standard of 60 days to process your claim.  This standard applies as long as you are a CCPC and your claim is not selected for a detailed review.

So, with a bit of planning, you should be able to arrange for your SRED funding to arrive every year within 8 months of your fiscal year end.

Use our SRED calculator to estimate how much money you might receive!

 

Note: Some SRED deadlines that fall due in 2020 have been extended due to disruptions from the COVID-19 pandemic.  See here to see if you might be able to take advantage of these extensions.

Software engineering

SR&ED Primer for software firms and start-ups

Here’s a quick SR&ED primer for software firms and start-ups

Tech items

SRED is claimed in arrears, year by year, as your work and project(s) progress.

The key activity to strengthen your SRED claim is to document your technical work as you proceed.  Date all your work entries.  Keep track of your hypotheses as you proceed, the technological advancements you are trying to achieve and the technological obstacles/unknowns that you face.  For software documentation, it can be helpful to highlight milestones achieved and prototype development phases.

As you document your work, be sure to note setbacks, re-works, failed hypotheses, tech lessons learned.  All these (bad) elements demonstrate that you aren’t doing routine coding/routine engineering.

Any dated technical correspondence is useful and should be saved.  Email, correspondence with suppliers/partners/customers, test results, git repositories describing software changes etc.

Qualifying SRED work is all activity that occurs during the course of experimental work to resolve one or more technological obstacles and/or unknowns that stand in the way of your project success.   Supporting work that is necessary to carry out the experiment(s) during this time frame is claimable.  For example, you could hire a number of summer students who are not even aware that app development/R&D/SRED work is underway.  But if they are doing test tube washing, results gathering, stats checking etc etc necessary for the successful prosecution of your experiments, we will claim their work.

Bookkeeping items

SRED is claimed under a single business number.  Once your corporation is set up, make sure all T4’s, wages, bills, invoices, contracts are generated under that one BN/HST number.

All salaries should appear on T4’s under the company BN.  Owner salary is closely scrutinized.  Make sure it is regularly recurring.  Owner bonuses, irregular drawings, and certainly any dividends paid, cannot count as SRED expenses.

Keep some track of the hours you dedicate to the corporation vs your regular practices.  Say you pay yourself $50K in the new corporation.  If you track your time over the course of the year in the new corporation as 1000 hrs, then your billable SRED rate for qualifying work is $50/hr.  If you only dedicate 250 hrs/yr to the corporation then your hourly sred rate will be $200/hr.  Note that you have two hrly figures to account for in the corporation.  Your total time spent which includes admin time, sales, fundraising etc and then your actual technical hrs which are SRED claimable.  Note that as an owner of the firm, you’re allowed to claim a max of 75% of your time as SRED claimable. Employees you hire who are tech-dedicated can be claimed for up to 100% of their time.

All subcontractor costs are eligible for SRED if the individuals have SINs and the companies have BNs/HST numbers.  American/foreign subcontract work and expenses cannot be claimed.

Prototype materials and scrap materials are claimable but these typically don’t occur for software-only work.

Here’s a calculator which can be used to estimate your potential SRED credits.

SR&ED primer for software firms – General

G6 is available to you at all times for questions and to help track your progress.  If you set up as a Dec 31 YE company, we will complete the SRED submission in the first few months of the following year.  At that time I will work with your accountant to get the SRED integrated and submitted with your business taxes.

First time SRED claimants get reviewed by the government.  A tech person and a financial type from CRA will come out and review your submission.  One-project reviews take a couple hours.  I’m there to support you and answer financial questions on how the claim was put together.  You describe your app technically and answer any questions the tech reviewer may have.  If we have prepared correctly, your first claim will receive an FTCAS designation.  Read here about FTCAS and why it is so important!

Upon success, you get a fat Govt of Canada cheque, and I will then bill you for a fraction of that amount.  If you continue to develop apps, it is feasible and usual for companies to claim sred annually.

CEWS and SR&ED

CEWS and SR&ED – Updated!

CEWS is government assistance and must be deducted from SRED

Claiming CEWS and SR&ED is new for 2020.  And it’s a bit tricky.

The CRA has confirmed that CEWS is considered to be government assistance with respect to SRED so it must be deducted from SRED expenses on some “reasonable” basis.

There is no formal methodology available from the CRA for deducting CEWS from a 2020 SRED claim.

It’s critical to deduct only a “reasonable” CEWS amount from SR&ED expenditures

We can look to well-established procedures for deducting IRAP payments from SRED expenditures to start to develop a reasonable way to deduct the appropriate amount of CEWS from 2020 SRED claims.

IRAP payments are not deducted from SRED when the IRAP payments are made to non-SRED personnel.  For example, let’s take the case of a company which receives IRAP funding for 5 headcount consisting of 4 engineers and a business development person.  Let’s say that each head is IRAP funded at $2,000 per month for 12 months for total IRAP funding of $120,000.  The IRAP amount which will be deducted from SRED expenditures will be $96,000, not the full $120,000.  The BD person cannot be claimed for SRED, therefore his portion of IRAP is not considered to be government assistance with respect to SRED.

Likewise, IRAP payments are not deducted from SRED expenditures if there is a period mismatch between an IRAP subsidy and the SRED work performed.  Say a company has a July 31 YE.  In fiscal year 2019, the company carries out a SRED project from Sept 1, 2018 to Dec 31,2018.  The company then receives IRAP funding in the same fiscal year from April 1, 2019 to July 31, 2019.  The IRAP payments are not deducted from the SRED expenditures for FY19 because the SRED work and the IRAP subsidy period do not overlap.

Finally, extending the above concepts, we can see that government assistance is only deducted from SRED expenditures when the assistance is “in respect of” SRED work.  Consider two identical 10 person companies each receiving identical CEWS payments.  Company A has each employee working on SRED 10% of the time for annual SRED expenditures of 100K.  Company B has all SRED carried out by 1 employee 100% dedicated to SRED for the same SRED expenditure total of $100K.  It is reasonable to see that these two otherwise identical companies have received the same government assistance “with respect to” SRED.  Therefore it is reasonable that the CEWS amount deducted from both companies’ SRED expenditures should be the same.

Match CEWS subsidies to SR&ED salary expenditures

In summary then, the amount of the CEWS deduction must be calculated person by person based on the percentage of time that person spent on SRED work    This can be stated as a formula as follows:

CEWS deducted from SRED expenditures = % of time spent on SRED x CEWS received

This formula looks simple, but it can be difficult to apply in practice.  As of October 2020 we have 7 CEWS claiming periods, 2 more periods have been announced and CEWS is now likely to be extended to mid-2021. This means we will likely have 11 total claiming periods for CEWS by Dec 31, 2020.

The CEWS subsidy will vary by employee by period, especially for modestly-paid employees who do not max out the CEWS subsidy in a given period. For example, in CEWS periods 1 to 4, employees earning less than $1129 per week will attract less than the $847 per week CEWS maximum benefit.  The percentage of time spent on SRED per employee will likely often vary by CEWS claiming period too.

So the formula above to calculate the appropriate amount of CEWS for a company to deduct must be calculated per SRED employee per CEWS claiming period. A 10 person company with 10 SRED practitioners and a Dec 31st year end will require the above CEWS formula to be calculated and summed up to 110 times to calculate the proper CEWS deduction for their 2020 SRED claim (10 SRED employees x up to 11 possible CEWS claiming periods in 2020).  To paraphrase Roy Scheider in Jaws: “We’re going to need a bigger spreadsheet!”

CEWS can’t reduce your SR&ED claim to zero

Again as with IRAP, CEWS deductions do not reduce a SRED claim’s proxy amount.  So there is a limit to the percentage amount that CEWS can reduce a SRED claim. In a worst case scenario, all SRED would be conducted during CEWS claiming periods by personnel who all earn less than the $1,129 per week maximum claiming amount of salary.  Put the CEWS salary subsidy at 75% of all SRED employees’ pay. Even in this scenario, the SRED claim will be worth 52% of it’s original pre-CEWS amount because of the proxy amount. (Proxy = 0.55 salary expense, salary expense netted to zero due to CEWS, therefore Surviving SRED claim = (0.25 x salary expenditure + 0.55 x salary expenditure)/1.55 x salary expenditure = 52%)

More Information on CEWS and SR&ED

Here’s the formal announcement of the CEWS and SR&ED policy from June 19, 2020:

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. The announcement is  here.

Tax credit claiming ins and outs here.

Try the G6 Consulting SR&ED calculator

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What can you claim for research and development?

What can you claim for research and development under the Scientific Research& Experimental Development (SR&ED) program?  SRED claims are built by claiming eligible expenses for projects.  Projects are split into fiscal years. So, a complete claim for SRED is composed of 1 to many projects with all eligible expenses included for a given fiscal year.

SR&ED is a subset of R&D.  The portion of R&D work which is claimable is called qualifying work.  See this piece for detailed information on identifying qualifying work:  https://www.g6consulting.ca/what-is-sred-qualifying-work/  Briefly, qualifying SRED work is that portion of R&D performed while you are experimenting to resolve the technologic obstacles or unknowns which the project faces.  In a physical example, qualifying work is building a minimum feature set prototype which can then be tested. You learn about your technological unknowns as you iteratively test and modify your prototype. As you learn about the unknown(s) you are making technological advances. This work is the heart of SRED, and it is called qualifying work.

A well-known example of very large scale prototyping was NASA’s work to put a man on the moon in the 1960s. When President John F Kennedy challenged NASA to go to the moon in 1962, there were many technological obstacles and unknowns to fulfilling that mission,  NASA planned their prototyping and experimentation into a series of missions, grouped into phases called Mercury, Gemini and Apollo.  These missions broke the huge unknowns NASA faced into smaller experiments: unmanned spacecraft orbiting Earth, chimpanzees orbiting Earth, etc., all the way to Apollo 11 which successfully proved NASA’s hypothesis that they could put a man on the moon and return him to Earth safely.  The later missions relied on expertise gained, and technological unknowns resolved, in the earlier missions. If Apollo were being claimed as SRED, the qualifying work would encompass not just the direct experimental development carried out to stage each of the Mercury, Gemini, and Apollo missions.  The qualifying work would also be comprised of all the engineering, analysis and planning work which was a critical part of supporting the missions successfully.

Now that we have a project defined and we know the scope of work that is considered to be qualifying work, we are close to sizing up how much we can claim for an SR&ED project.  There are three types of expenses which we can claim for SRED.  These expenses are payroll, materials, and subcontracts. For a detailed explanation of calculating the R&D tax credit, go see this article: https://www.g6consulting.ca/how-do-you-calculate-the-rd-tax-credit/

Briefly, the first and largest SRED expense bucket is payroll.  We enumerate the hours spent by each company staff member as they are performing qualifying work.  We calculate employees’ hourly rate by dividing annual salary by hours of work in the year.  The government allows a 1.5 times uplift factor to this hourly rate to account for overhead costs to support the employee in his work.  This overhead factor is called proxy.  The second claimable expense is materials. Allowable material expenses are comprised of scrap and prototype costs.  If your experiments generate scrap material, this expense can be claimed.  If your experiments require a prototype to be built, the material costs in that prototype are claimable.  A software claim or a process improvement SRED claim will generally not generate material costs.  The last claimable SRED expense is subcontracts.  Subcontracts are payments made to people outside your organization who are performing qualifying work on your project.  These subcontract payments may be for a company performing specialized testing on your prototype, or it might be hiring a subject matter expert in computer security for a software SRED claim.  Allowable subcontracts for SRED must be to Canadian individuals and Canadian companies.

Now that we have all the allowable expenses assembled for our SRED project, we are ready for the final step.  We need to multiply the SRED expenses by a SRED credit percentage to determine the amount we can claim. For a small business corporation, called a CCPC, the SRED credit percentages are 66, 42 and 34% respectively for payroll, materials, and subcontracts. That’s it, you’ve gone through all the steps to determine what you can claim for your SR&ED project.

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SR&ED claiming deadlines EXTENDED due to COVID-19

The CRA has extended SR&ED claiming deadlines for 8 of the 12 months of fiscal year ends for firms’ scientific research and experimental development (SR&ED) claims.  This deadline extension helps companies impacted by COVID-19 by giving them more time to file claims with a deadline that falls during the pandemic.  In some cases, this extension will give companies the ability to file SRED claims for periods that had already expired.  This is an unprecedented claimant-friendly move by the CRA.  This extension falls under a new bill called Time Limits and Other Periods Act (COVID-19).

The first extension affects claimants with September 30 to December 31 year ends who did not get their 2018 SRED claims in on time. Under this extension, these companies are now able to file their previously-expired FY18 claim until the following dates:

The SRED extension also extends the claiming deadline for early 2019 fiscal year ends.  Companies with January to May fiscal year ends get the following filing extension for their 2019 SRED claims:

Call G6 Consulting for assistance so that you never miss another SRED deadline, or cheque, again.  We make sure your cheque is as large as possible by identifying all your work that qualifies as SR&ED and all the related valid SR&ED claimable expenses.  We’ll work with you to put in place easy systems so that your SR&ED evidence gathering, and claim preparation and submission become a routine part of your normal workflows.

R&D graphic G6 Consulting

R&D vs SR&ED – What’s the difference?

Lots of people struggle with the difference between R&D vs SR&ED.

“Research and Development” is a phrase used to denote activities, the overall goal of which is to gain and use knowledge. These activities are normally well organized, making use of the methods of various branches of knowledge and the services of highly trained personnel. Scientific research and development (referred to generally as “R & D”) signifies activities focused on the natural sciences rather than the humanities and social sciences. R & D is usually classified, according to its aims, into 3 broad categories: pure research, applied research and development. Pure research is curiosity oriented, undertaken to advance knowledge for its own sake; applied research is carried out in anticipation that its results will be useful to technology; development is concerned with transforming technological knowledge into concrete operational hardware.

Scientific Research and Experimental Development is a Canadian federal government program which uses tax credits to incent private enterprises to perform R&D in Canada.  The SR&ED Program has been in existence since 1986.  It is administered by a standalone group within CRA.

SR&ED covers all three categories of R&D noted above.  The government notes that most work funded under the Program is applied research and development as opposed to pure research.

Government R&D tax credits are available to qualifying Canadian corporations doing innovative work or solving technical challenges in their day to day work.

In 2018, over $3 billion was awarded to 18,000 Canadian companies.  That is the biggest R&D credit program in the government.  It dwarfs dedicated R&D programs like IRAP or NSERC and is about 5 times the size of RESP credits disbursed.

Start-ups who have incorporated in Canada and who have staff on a regular payroll are a particularly well-served group under this program. Your qualifying expenses (payroll, prototype materials and qualifying subcontractors) attract credits at well over double the rates paid to large corporations.  Also, all credits are paid to you in cash.  You do not need to show profits to qualify for SR&ED.

SRED is defined in the Income Tax Act (ITA).  Deep in the ITA, page 2709:

“Scientific research and experimental development” is a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis… for the purpose

of creating new, or improving existing, materials, devices, products, or processes, including incremental improvements thereto.

Along with the experimental work itself, scientific research and development also encompasses what the ITA terms supporting activities.  Again, direct from the ITA:

“Work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described (above).”

R&D vs SR&ED

So, what is the difference between R&D vs SR&ED generally?  SR&ED is a subset of R&D. SR&ED is the portion of your R&D work where you are actively searching and experimenting to overcome a technological obstacle or unknown.

Here is an example of R&D vs SR&ED.  Say you are a bicycle manufacturer and you are not happy with the reliability of your painting process for red bicycles.  Red is the most popular bike color, but it is your most problematic paint to apply reliably. In the summer production months, with high shop ambient temperatures and high and variable humidity levels, the adhesion of your red paint is poor. Also, testing shows that the red paint thickness levels vary widely across different parts of the bike frame.  You know from your logging of warranty repairs that a consistent thickness of paint deposition is key to long term paint adhesion, and resistance to paint chipping and fading.  You enter a due diligence phase where you search for different industry or standards-based solutions to your paint challenges.  This work may include exploring alternatives with paint suppliers, consulting coatings experts and collaborating with other local manufacturers who have experience with paint application in hot environmental conditions.  You pick some promising techniques to determine whether they have applicability to your situation.  This work you are performing is certainly R&D, but it is not SR&ED.  Researching and testing standard industry solutions is considered to be product selection.  It does not rise to the level of experimental development.

After exhausting standard solutions, you decide to start an experimental development project to deliver all-season reliability to your red paint application process.  You hypothesize that a multi-stage painting process is required to deliver reliable long-term red paint application.  You theorize that running your bike frames twice through a modified version of your existing paint line, once wheels-down and once wheels-up, will deliver a consistent reliable result.  Experimentation shows some promising results for this new process, especially for horizontally oriented sections of the bicycle frame.  The depth of paint deposition achieved is much more consistent on those horizontal frame elements on the top and bottom of the tubing vs our single pass “wheels-down” production paint process.  There are still deposition problems on the bike main diagonal tube and in complex join areas near the bicycle crank.  You conduct further tests with 3 and 4 passes of paint deposition, with the frame oriented differently for each pass.  The 4-pass paint process yields excellent results, even under the worst simulated temperature and humidity conditions.  You have now learned something important.  But a 4-pass paint process wrecks your unit manufacturing costs and your cycle time goals for producing 18 bicycle colors.

You experiment with ways to achieve 4 pass paint reliability with a maximum of two passes through your bike paint operation.  You achieve promising results with a modified conveyor which rotates the bike frame through multiple axes as it goes through your paint process.  This process achieves much more even deposition of paint using only two passes.  You experiment with sacrificial coatings where the paint thickness is still too great.  Finally, you add targeted sprayers to the final coating pass at the end of the line when the frame is no longer rotating.  These sprayers precisely add paint to the last undercoated frame areas.  Testing confirms a completely reliable red paint process.  Your SR&ED project is concluded successfully.

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Can I get SR&ED for a private company owned by a non-resident? Non-resident SR&ED eligibility

Is non-resident SR&ED eligibility possible? Yes, companies owned by non-residents, operating in Canada, properly registered with a CRA BN (business number), can receive SR&ED tax credits.

The catch is that these companies qualify for much lower SR&ED credit percentages than a similar private company owned by Canadians.  Foreign- owned companies qualify for federal ITCs (Investment Tax Credits) at a 15% rate on qualifying expenses.  These foreign-owned companies also qualify for an Ontario tax credit called ORDTC which is 3.5% of eligible expenses.   Canadian owned private companies (called CCPCs) qualify for much more generous tax credit percentages.  CCPCs receive 35% ITCs from the feds and two Ontario SR&ED credits, OITCs at an 8% rate and ORDTCs at a 3.5% rate.  If you do the arithmetic, you can see that Canadian-owned firms qualify for SRED credit percentages which total over 2.5 times those available to foreign-owned private companies.  The total percentages are 18.5% credits vs 46.5% credits for foreign vs domestic companies respectively.

Clearly, it is advantageous for private companies, which are eligible for SR&ED, to structure their ownership in such a way that they are designated as a CCPC.

A CCPC is a private corporation which is controlled by Canadian residents. A corporation will not qualify as a CCPC if it is controlled directly or indirectly by a public corporation or non-residents, or a combination of the two.

Let’s break this requirement down.  A CCPC must be controlled 50.1% or more by Canadian residents.  These Canadian residents can be individuals (Canadian residents with a valid SIN card) and/or other CCPCs.  Determining control can be complex when there are nested corporations involved.  Control is tracked by a specialized T2 form called the Schedule 50.  If you have a complex ownership situation, you want to get a lawyer and or an accountant involved who is well experienced in this area.  If the CRA determines that you have been mis-claiming SR&ED as a CCPC, they will go back to prior years and claw back excess credits you have received.  This can involve large sums of money they must be repaid based on the 2.5 times domestic vs foreign SRED credit differential.

Here’s a couple straightforward examples.  A company operating in Canada owned in equal shares by 4 Canadians and 3 Americans will qualify as a CCPC for the preferential large SR&ED percentages on qualifying expenses.  A company operating in Canada owned by 4 Americans will qualify for SR&ED credits but only at the lower foreign-owned percentages.

I will mention here for completeness that publicly owned companies are lumped in with foreign-owned companies to qualify for the lower SR&ED credit rates in Canada.

There are two more big advantages of CCPC’s claiming SR&ED vs foreign-owned firms.  First and most importantly, your federal ITC credits and the Ontario OITC credits come to you as refundable credits, ie cash.  The foreign-owned company gets non-refundable credits, which can only be turned into cash when applied against an outstanding tax balance owing.  That is a big advantage to CCPCs, especially for start-ups and companies with limited or variable profitability.  Second, CCPC SR&ED claims are processed on an accelerated schedule, within what is known as a 60-day service standard.  Foreign-owned and public company SR&ED claims can take up to 365 days to process.

Call G6 Consulting to get all the answers to your questions about non-resident SR&ED eligibility.

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A SR&ED tax credit example

Here’s an SR&ED tax credit example to show the steps involved in claiming an SR&ED tax credit.

The first step is seeing whether your business might qualify for SR&ED money.   Call G6 Consulting and schedule an introductory call with Greg Hills.  There is no obligation to you or charge for this call.  The first requirement for SRED is that you are engaged in a technical line of business.  Businesses engaged primarily in retail, legal, marketing, sales, or distribution activities most likely have no ability to make a claim.  The verticals that may have SRED-claimable work are broad.  Software, manufacturing and process companies, start-ups, wineries, and green firms all widely claim SRED credits. There are several technical verticals where the firms in those lines of business in my experience under-claim SRED.  These industries include agriculture, food production and engineering service companies.

If you are in a technical line of business, Greg will meet with you and review potential qualifying SR&ED work you have performed.  Have you developed any new products, or developed enhanced features to existing products? Have you built any prototypes? Have you developed any technology to increase productivity or efficiency in your business? These types of activities are all hallmarks of SRED-claimable work.

SRED credits are claimed for work you have already performed.  This makes SRED the opposite of traditional R&D funding mechanisms like IRAP, where researchers write proposals for work they will undertake if they receive funding.  A big advantage of SRED is that its provisions are built right into the Income Tax Act.  This means that if you meet the requirements for funding, you will receive your credits.  There is no competition for available funding between firms, nor is there a pot of money that may or may not have funding after you have qualified.  The amount of SRED funding available to you is unlimited.

Your ability to claim SRED credits is time limited.  We must file your SRED claim within 18 months of the end of the fiscal year during which the SRED work was performed.  If you think you may have a claim, do not wait until the end of June to explore your options.  With a December 31st year end, you could lose a year’s worth of SRED credits if we cannot submit your completed claim before the June 30th deadline.  This could be a loss to you of tens or hundreds of thousands of dollars!

Once we identify qualifying work within the proper time frame, G6 will gather details about your work and separate the work into projects by fiscal year.   We build a write-up of your work which lays out how your work meets the technical requirements for sred qualifying work, all in less than 1400 words per project.  One of the final steps of preparing a claim is assigning allowable payroll, material, and subcontract expenses to your project.  If you want to learn more about this step, and how sred credits are calculated, read this post: https://www.g6consulting.ca/how-do-you-calculate-the-rd-tax-credit/

Next the SRED projects are transferred onto the proper CRA claiming forms, organized by fiscal year.  If we are claiming SRED for a fiscal year where you have already filed your business taxes, G6 will file the SRED claim as an amendment to your previously filed taxes.  Ideally, and certainly for future claims, G6 will co-ordinate with your accountant so that the SRED is filed as part of your annual T2 filing.

For first time claimants, the government schedules a review at your site, typically a month or two after your claim is submitted.  The government sends a technical and financial reviewer to learn about your business, educate you about sred and review your claim to ensure it meets sred standards.  G6 is with you during this review, which typically takes a half day to a day to complete.  Ideally your first claim is assigned FTCAS status, where the above review takes place, but it is less in depth because your claim has already been pre-approved prior to the review. For more detail on FTCAS and its importance, see this case study.

After a successful review, your SRED credits will be direct deposited into your business bank account within about a month.  At that time, G6 will bill you a contingency fee based on a percentage of the cash you received.

Many companies who get SRED money successfully from the government find that they are doing qualifying work annually.  G6 works with you to make documenting your SRED activities part of your regular workflow.  You will file SRED annually as part of your T2 tax return.  Processing times for repeat filers are often accelerated with turnaround times of a few weeks rather than months as in the above example.  G6 will now work with you to strategize how SRED can be a key component in funding your business success and growth by incenting you to expand your technological expertise and undertake groundbreaking projects.

Check out our SR&ED case studies for another SR&ED tax credit example.  Or this post for a software SR&ED tax credit example.  Finally, download our SRED credits calculator here!

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Free Government Money during Covid-19

SRED funding isn’t the only source of free government money during COVID-19.

Imagine. We may look back at today, and our 53.53% marginal tax rate in ON, and think, “Those were the good old days!”  And yet Finance Minister Bill Morneau flew back from Kenya, or possibly it was France or Ecuador, and tells us that we are on track in 2020 for a $340B deficit. Yikes.  As a side comment, it has always struck me as a bit of a mugs game that we put retirement money into an RRSP because “tax rates will be lower X years from now when we retire”.  Hmm, maybe, maybe not.

So, a wise squirrel should probably be putting aside extra nuts for winter.  There are two free money federal  programs arising from COVID-19 you will want to check out.

First up is CEBA.  Receive $40 K as an interest-free loan until Dec 31, 2022.  Repay the loan by that date and $10K is forgiven automatically.  Free government money.

CEBA is simple to apply for.  You apply through your business bank account and you do not have to deal directly with the government.  The app to apply is entirely online, it takes only about 40 minutes to complete.

One of the few criteria for qualifying is that the company must have incurred between $20K and $1.5M in T4 payroll for 2019.  A company’s 2019 payroll amount is shown on Box 14 of the T4 summary which was filed by the company and/or its accountant by Feb 28, 2020

How can smart Canadian businesses leverage their $40,000 CEBA money?   Put the money toward qualifying SRED payroll.   You will receive your $10K free CEBA money and you will also receive $28K in SRED funding.   $40K worth of work for a net cost to you of only $2K.  Wow.  Click here to learn how to calculate SR&ED credits.

Second up is CEWS.  This is a wage subsidy of up to 75% for your eligible staff.  CEWS is not as straightforward as CEBA.  The catch with CEWS is that you must be able to demonstrate a significant reduction in your company revenue during COVID timeframes.  This would be easy if you are an airline, but who wants to be an airline today?! On the plus side, CEWS has no cap on the subsidy amount you can receive. If you have a large staff, CEWS could be very lucrative for you.

For completeness, I will mention two personal subsidy programs related to the pandemic that are available to help people.  CERB is a $2000 per month wage replacement program for people who have lost their job due to COVID.  The program has been extended now until October 2020.  It is a mammoth program, projected to account for $65B of the federal government’s deficit this year.  There is also a program for students who cannot find work this summer, CESB.  It is straightforward and can pay eligible students $1250 per month for up to four months.

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How do you calculate the R&D tax credit?

How do you calculate the R&D tax credit?  It is calculated based on the value of qualifying work you have performed on a project in a given tax year.  If you’re not clear on SRED qualifying work, go read that post, here: https://www.g6consulting.ca/what-is-sred-qualifying-work/

Are you back? Great. R&D tax credits are calculated per project.  You can submit a claim with 1 to n projects if each project has qualifying work.

Group your expenditures by project and by tax year

SRED is administered by a standalone group within the CRA.  SRED claiming follows income tax timelines.  So, your SRED claim will be split up by your tax fiscal year.  You claim SRED in arrears, that is, you claim SRED for a past years.  You can submit a SRED claim at any point from the end of the fiscal year to 18 months later.  So, if your company’s fiscal year is Dec 31, you can submit a SRED claim for your 2019 year up until June 30, 2021.  For this example, you would be claiming any eligible work carried out on or after January 1, 2019, because that was the first day of your FY19 fiscal year.

Some SRED projects can be long-lived and they can take years to complete.  If that is the case, you split that project into fiscal year chunks and claim year by year.  You do not wait for the end of that project to claim because you could conceivably run into the 18-month deadline described above.  The 18-month deadline is fixed, there is no mechanism to receive an extension to claim earlier work.  There are two more steps for how do you calculate the R&D tax credit?

Sum up allowable SRED expenses

We now have qualifying work split into projects which are divided into individual fiscal years. We are getting closer to calculating the R&D tax credit.  R&D tax credits are earned for 3 types of expenses incurred when you are performing qualifying work.  Those three expenses are payroll, materials, and sub-contracts.  Up to a few years ago, we could claim capital expenses for SRED.  This is no longer the case.  So, R&D items like buildings, depreciation, lab equipment, test gear, software, leasehold improvements like ventilation, lighting, safety equipment, new CNC machinery.  None of these are claimable as SRED expenses.   We are going to tabulate all the eligible SRED expenses, sum them across all projects for a fiscal year, then multiply the expenses by a percentage to calculate the company’s sred credits.

The No 1 expense claimed for SRED is payroll.  Keep track of the hours of staff members who are directly involved in carrying out qualifying work.   Multiply these hours by the staff members’ hourly pay rate.  For salaried employees, calculate a deemed rate by dividing the employee’s annual salary by hours worked in the year, typically 1920 to 2000 hours.  So, Bob the lab technologist makes $60K per year.  His deemed hourly rate is $60000/yr. /2000 hrs./yr. or $30/hr.  Bob spent 200 hours of qualifying work on Project 1 during FY19.  Therefore, the payroll SRED expense for Bob is $6000.  We are not quite done.  The government allows us to claim an overhead amount for Bob to account for his workplace expenses, lab gear, computing resources etc.  This is called proxy and it is equal to 50% of the employee’s claimed SRED payroll expense.  So, the actual SRED expense amount for Bob’s payroll for Project 1 during FY19 is $6000 x 1.5 or $9000.

You can claim two types of material expenses for SRED.  First are materials used to build prototypes.  Include the cost of shipping the materials to you.  Second, you can claim scrap materials consumed during SRED experiments.

The third and last type of SRED expense is subcontracts.  Subcontractors can be individuals or firms, but they must be Canadian to qualify, that is have a SIN or an HST/BN number.  We total all the subcontract work for a given project then claim 80% of that total as a subcontract amount for the SRED project.

Total all the payroll, material, and subcontract expenses for all projects for the year and this is your total SRED expenditures.

Apply the right percentage to calculate the SRED credit

You earn SRED credits by applying credit percentages to the SRED expenditure total amount.  Claims earn both federal credits, called ITCs, and provincial credits.  In Ontario there are two SRED credits, OITC and ORDTC.  Prior to 2010, provincial credits were paid separately but all credits are paid at one time now since SRED harmonization.

The credit percentage varies based on claimant type.  Large/foreign owned/public corporations, partnerships and individuals are lumped into one class.  These groups get 15% ITCs, no OITC and 3.5% ORDTCs.  SRED credits for these claimants are non-refundable.  Non-refundable means that these credits can only be turned into cash by applying them against an outstanding balance.  You can carry SRED credits back three years or hold them on account for 20 years if you cannot apply them all against tax owing in the year they are earned.

Small business corporations, called CCPCs, get the most lucrative and flexible, SRED credits.  CCPCs, earn 35% federal ITCs, 8% OITC credits and 3.5% ORDTC credits.  You can see that, per dollar of SRED expenditure, a CCPC earns over 2.5 times the SRED credits of a large or foreign-owned corporation.  For a CCPC, the ITC and OITC credits are fully refundable.  This means they are awarded as cash.  This is a key benefit for start-ups and cyclical businesses as you do not have to wait for profits or tax balances owing to cash your SRED credits.

How do you calculate the R&D tax credit?  G6 has a spreadsheet which automates the calculation of R&D tax credits.  Get it here!