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.

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.

Here’s three classes of software development work that represent qualifying work.  If you can slot your work into one (or more) of these categories, you are likely doing qualifying sred work:

If your software project lead could go to a technical conference related to your project’s subject matter (Blockchain, computer security, node.js, hybrid cloud architectures, etc.) and present a talk or paper on lessons learned, problems solved, new developments in the space, etc. chances are he is describing SRED qualifying work.  Another test is risk of project failure for technical reasons.  Say you are attempting to integrate two different platforms, environments, or architectures to produce a new, third environment with novel/unique/hybrid properties.  You are unable to hire this expertise, so you carry out the work in-house.  If there is uncertainty regarding the successful technological completion of your project, this points to qualifying work.   Three.  Tools development is often qualifying work.  Say you repeatedly do projects for customers that involves similar steps.  Security scans, porting code from environment A to B, etc.  If you undertake a project to build a tool to automate a set of tasks or jobs, it is often likely that this tools development represents qualifying work.  Fourth, and last software test/example.  Say you are developing new code which must operate within a technological constraint that involves scaling.  This could be response time under load.  Ability to develop code with X functionality that will fit within a given memory or disk constraint.   You must build a minimum viable feature set of the app to test it to see if it meets the technological constraint(s).  This would probably represent qualifying 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.

table headline last

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.