In this article we lay out the nuts and bolts of the SR&ED process and we answer the question, “How does SR&ED work?”
The SR&ED program details are spelled out in the Income Tax Act, ITA. The SR&ED process is entirely administered federally, despite the fact that each province has a piggyback SRED program which awards credits in conjunction with the federal SRED credit awards. Because SRED funding is awarded based on rules in the ITA, claimants are not at risk of the funding pool running out in a given period due to high demand. If your firm meets the ITA rules, you will receive SR&ED funding. Provincial SRED credits are laid out in each province’s tax act. Since SRED harmonization occurred at the end of 2008, all federal and provincial SR&ED credits are applied for, and awarded, solely via the CRA federally.
The SR&ED program is administered by a dedicated group within CRA. The SR&ED process therefore takes on forms and timelines common to the T2 corporate tax program. A firm applies for SRED credits as part of its annual T2 filing. There are SRED-specific T2 forms, the T661, the T661 part 2 and the Schedule 31 which we use to apply for SRED funding annually. We can also apply for SRED using a T2 amendment to apply for credits for the prior one or two fiscal years. These amended claims can only be submitted within 18 months of a company’s fiscal year end. Some SRED projects may be long-lived and stretch several years before they are concluded. In those cases, the claiming firm breaks the project into fiscal year chunks and claims for the work fiscal year by fiscal year.
At a field level, CRA SR&ED staff is composed of Research Technology Advisors, RTAs, who review the technical work which comprises the claim’s projects, and Financial Advisors, FAs, who concern themselves with thee accounting and numbers aspects of the SR&ED claim.
How does SR&ED work with respect to reviews? A fundamental difference between SRED claims and a T2 submission is that any SRED review or audit is conducted before the SRED assessment is delivered. This is done deliberately by the CRA because SR&ED is an incentive program. The government wants firms to deploy SRED funding within the company immediately without setting aside a large portion of the funding to address later funding amendments or clawbacks.
All first time SRED claims are reviewed by the CRA. The review is either a full audit or an FTCAS. An FTCAS is much preferred, because it is composed of an SR&ED process whereby the claim submitted is approved as filed after the claimant goes through a mandatory training session with a CRA RTA and FA. The claim may be discussed in the FTCAS but it is not formally evaluated. More information on FTCAS here: https://www.g6consulting.ca/sred-ftcas/
When customers ask me “How does SRED work?” I tell them to focus on the technical side of their claim. 95% of a claim’s strength is based on the quality of qualifying work in the projects and also the evidence that backs up that work. The CRA has a $10 word which is very important for evidence called “contemporaneous”. Contemporaneous means generated when the work is performed. It’s vital for SRED practitioners to take dated notes and photos of work as they carry out the SRED work. As a very low tech example, it is simple to track your business car mileage if you make a habit of recording it daily. It’s difficult or impossible to track your mileage monthly or quarterly. It’s the same principle with SRED.
G6 Consulting can work with you to show you how SRED can accelerate your business goals and your business’ growth. We are not here to maximize your 2019 or 2020 FYE SRED claim. We are here to help you maximize the SRED funding you receive over the next ten years.
Check our 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 S&ED calculator to get an idea of how big your SR&ED cheque could be