SRED Tax Incentive Considerations for your Engineering or Software/IT Consulting Project

You are an engineering or software/IT consulting firm that has just completed a contractual agreement with another company. The team is tired but energized over the successful execution of a challenging project!

The big question though is: What should be done next?

Should you be sharing a glass of champagne/scotch in celebration? Should you be pivoting to the next project to build off of the recent success? Or is it better to consider how your firm can get the most out of its recent project?

In today’s post, I will be focusing on the latter with the focus being on determining whether that successful project qualifies for Scientific Research and Experimental Development (SR&ED) investment tax credits. This is often an untapped source of money for engineering or software/IT consulting firms but there are a couple important items to consider:
1. Ensuring that zero ‘double-dipping’ is occurring; and
2. Capitalizing on opportunities to complete international projects.

Ensuring that zero ‘double-dipping’ is occurring

Double-dipping occurs when Company A (i.e., the performer: Canadian company performing the work) and Company B (i.e., the payer: Canadian company paying for the services) both submit a separate SR&ED claim for the same project. The Canadian Revenue Agency (CRA) actively monitors this and has made it mandatory for Company B, the payer, to list all subcontractors with their business numbers on their T661 forms. This helps the CRA to reference against other submitted claims to minimize the occurrence of double-dipping.

To build off of the earlier example of Company A and Company B both submitting separate claims. Let’s consider an example where Company A, the consulting firm, could still potentially submit a claim.


Example 1: Project expenditures above and beyond contract payment

Company A agrees to perform services and Company B agrees to pay $100K for these services. At the conclusion of the project, Company A has $120K in expenditures and Company B pays them $100K for those services. Company B can submit a SR&ED claim for the full $100K.  

Company A can also submit a SR&ED claim for their qualifying expenses ($120K) but they have to deduct the money they received for this effort, (ie company B’s $100K payment).  This $100K is known as a subcontract in respect of SRED and it must be deducted to avoid double dipping..
The impact on Company A’s SRED claim is not as bad as it looks. Their $120K salary expenditure is grossed up by the 1.55 proxy overhead amount before deducting the Company B subcontract payment of $100K.  So Company A will still be able to claim $86K of expenditures for their project work ($120K x 1.55 proxy -$100K for the project = $86K), not just $20K ($120K expenditures – $100K subcontract payment.   

Where possible, determining who will be submitting a SR&ED claim for the project and who will own the intellectual property should be determined prior to signing the contract. Click here for further information or schedule a quick assessment with G6 Consulting.

Capitalizing on opportunities to complete international projects

Now let us consider that recently completed project was performed for a foreign company (i.e., foreign payer: International company paying for the services). In this instance, Company A, yes that is you, can submit a SR&ED claim for this project without worrying about double-dipping. Company C is unable to submit the claim as the program is targeted towards Canadians doing innovative work in Canada.

This can provide a competitive advantage for Canadian engineering or software/IT consulting firms when competing for international bids as they can leverage the SR&ED program. If you have recently completed a project or are considering submitting a bid on an international project, reach out to the experts at G6 Consulting to learn how the SR&ED program can be used to your benefit.

Optimizing your SR&ED Claim

We all know that completing that new, disruptive and innovative project brings along with it technical challenges and unknowns that your team will deftly manage. Uncertainties may abound, but your team will certainly triumph. That being said, it is important to consider how the SR&ED program can be leveraged to help enhance the competitiveness of your organization in securing these projects (e.g., capitalizing on opportunities to complete international projects). G6 Consulting can help guide consulting firms to maximize their business potential through the federal investment tax credit program.

Get your SR&ED done right with G6 Consulting Inc – Canada’s R&D Tax Credit Experts!

G6 Consulting can work with you to build your claim, co-ordinate with your accountant, submit your claim and get you your cheque. No cost until you get paid

Check out our SR&ED overview page to learn more about SR&ED and how to qualify

Contact an Expert for a free no obligation consultation to see if your business can qualify

Check out our SR&ED calculator to get an idea of how big your SR&ED cheque could be