Claiming US consulting work as SR&ED
Canadian engineering firms performing technical contract work for US customers is the most underclaimed area of valid SR&ED work I see. When I ask people about why they aren’t claiming this work, they have several theories or reasons why they can’t include this work as SRED.
The most basic misunderstanding I hear is that the contract work was fully paid for by the customer therefore the work is off-side – “That would be double-dipping!” This idea is wrong. “Double-dipping” has a specific meaning as it relates to SR&ED. Double-dipping occurs in SRED only when an engineering firm claims SRED for work paid for by a contracting company AND the contracting company claims the payments they made to the engineering firm for the same work as SR&ED subcontract expenses for their own project. That is it. This double-dipping is not allowed where sred expenses are being claimed by two (or more) companies for the same work. The risk of SR&ED double dipping is high in certain industries where technical supply chains are long. Automotive is a perfect example. A particular assembly for an auto manufacturer, say GM, may pass through 3 tiers of auto suppliers before it lands at GM and is incorporated into a vehicle. And each of those four tiers may have contract engineering work being performed by external firms as part of their design, engineering, and manufacturing effort. Given that complexity, some firms adopt a better safe than sorry policy: Any paid contract engineering work we perform – we do not claim any SRED on it. Some large manufacturers, Magna is a good example, put a SRED clause in all work which they subcontract. The clause states that any SRED work performed under this contract arrangement will accrue exclusively to the benefit of the contractor, Magna, in this example. The CRA defers to this sort of explicit contract language in any situation where double-dipping is identified or suspected.
As a subcontractor, you can avoid any possibility of SRED double-dipping by deducting all subcontract payments you received for a given project against the SR&ED expenses you are claiming for that project. These subcontract payments are deducted in the same way IRAP and CEWS are deducted from eligible SRED expenses. This approach generally only works on money-losing projects. If you somehow spend $200K in engineering effort on a sub-contract but you are only able to bill $20K for that work, you should be net amount of eligible SRED expenses.
Performing engineering subcontract work for US customers is so simple compared to the above examples. SRED double-dipping cannot happen on US (or other foreign) customer work. Why? Because that foreign entity cannot claim SR&ED. Whether you are fully paid, not paid, or double paid by this US customer is irrelevant to the CRA for SRED purposes.
If you maintain in-house design and engineering teams you know that it is an expensive and inflexible resource. Designers and engineers are highly paid. Spinning up or downsizing headcount in an engineering operation is both painful, slow, and expensive.
I often see firms which try to address these engineering resource issues by outsourcing technical functions to China and India. Another approach is integrating engineering resources into your firm as external subcontractors. A lot of these efforts are expensive and ineffectual.
The first place you should be looking to offset your engineering costs is by ensuring you are claiming all the SRED to which you are entitled. US contract work is a great area to examine first. Call G6 Consulting to assist. We recently doubled the claim of a Southwest Ontario manufacturer by properly claiming all their foreign, mostly US, subcontract work. As another example, we helped a 3-D printing shop aggregate work from a few US contracts to assemble their first SRED claim regarding the use of recycled resins.