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 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.
450 mgmt, sales, operations, factory employees.
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!