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