The Scientific Research and Experimental Development (SR&ED) Program is often an afterthought for businesses after the end of their fiscal year, looking to get what they can from qualifying expenses analyzed after the fact. This way of thinking is detrimental to the potential businesses have to maximize their SRED claim. Mistakes such as poor planning and insufficient documentation take a company’s SRED claim from an amount that can change the way they do business, to a mere nice bonus.
Mistake #1 – Outsourcing Work Internationally
A mistake that many businesses make when planning a business expense, is doing so independent of SRED. This leads to companies looking for the cheapest way to do a project and settling on employees or subcontractors not in Canada. Although the upfront cost of this may be smaller than doing so in the country, R&D expenditures outside of Canada receive 0% in the way of SR&ED credits. Compared with the potential 70% that could be claimed with a full-time employee inside of Canada, the upfront discount is almost never worth it. The Canadian government created SRED to incentivize R&D in Canada, it is critical to keep expenditures in the country to take advantage of it. Learn more about qualifying work
Mistake #2 – Hiring Subcontractors Instead of Salaried Employees
Outsourcing work to subcontractors instead of expanding salaried employees is an increasingly common practice. Subcontractors do not require benefits, have less onboarding cost, and are easier to terminate than salaried employees. With any project that involves research or experimental development however, it is more than worth it to hire full time staff. Where expenditures to subcontractors in Canada can be claimed at a 40% rate, salaried employees can be claimed at a 70% rate for SR&ED. In other words, if the work qualifies, it is likely that a business can hire a full time Canadian engineer for a $100 000 salary, and for the net cost to be a mere $30 000.
Another problem with salaried employees is double dipping. Many subcontractors will want to claim SRED themselves, and if they do so, your expense to them will not be eligible for SRED. This can create some difficult situations and open the door to an audit. As far as SRED is concerned, subcontractors are not the ideal way to structure expenses.
Mistake #3 – Poor Documentation
The simplest mistake that can trigger an audit or hurt your SRED claim is poor documentation. If you have all your projects and hours recorded as you go, filing SRED becomes a much simpler exercise, and more importantly, you can properly defend yourself in the event of an audit. It is similar to recording your expansible car milage – If you record your odometer every day, it is painless and everything is in order, if you try to do so after your boss questions the final total, you can imagine the mess. Record your projects and keep detailed timesheets to maximize your SR&ED.
These three tips are great ways to full take advantage of the Canadian governments SRED program. If you want to further maximize your SRED, make sure it is filed properly, and bullet proof if it comes to an audit, hire an expert to do your SRED. G6 Consulting is the top SRED firm in Canada, with a 100% customer service focus. Contact Us Today!