SR&ED Tax treatment
Are my SR&ED credits taxed? Yes they are. What is the accounting treatment of my SRED credits? Read on, we’ll cover the tax and accounting treatment for your SRED credits.
SRED federal ITCs are taxed in the year following the year that they were awarded. Provincial credits are taxed in the year that they were awarded except for the proxy portion of provincial credits which is rolled forward to the following year just like ITCs.
All SRED credits are claimed in arrears, so it is possible that all taxes will be payable on the credits as soon as they are awarded, even though ITC credits are tax-deferred by a year. If you file SRED regularly with your on-time T2 corporate tax filing, the bulk of the taxes owed on your SRED credits will be deferred for a year.
SRED tax treatment is automatically handled for straightforward SRED cases (single province jurisdiction, no complex deferrals) by accounting packages like TaxPrep and TaxCycle. Two SRED-related areas may not be automatically populated so we will cover them here. First is the transfer of relevant SRED amounts to the T2 Schedule 1. Second, because some SRED credit taxes are deferred from the current year, and not paid until the following year, it’s important to verify your rollover provisions for certain SRED amounts from the year credits are awarded to the following year. Generally L380 is the addition of the three SR&ED expense buckets, salary ((no proxy included here, materials and (80% of) subcontracts.
SR&ED Schedule 1 amounts
SR&ED taxes are accounted for primarily by 2 figures transferred from Schedule T661 to the Schedule 1.
First is an addition to the company’s net income on L118, “Scientific research expenditures deducted per financial statements. The figure added here is L380 from the T661. Note that this figure may be different if the financial statements have already been adjusted for SRED amounts, but that’s well outside our default case. L380 on the T661 is Total current SR&ED expenditures.
The second T661 transfer is a subtraction from net income on the Schedule 1 at L411, Scientific research expenses claimed in year from form T661. This amount is comprised of L460 from the T661, Deduction (of pool of eligible SR&ED expenditures) claimed in the year.
These calculations look opaque, but the net effect is to defer the current year ITC amount, the current year provincial credit proxy amount, and to tax the previous year’s ITC amount, if any.
SR&ED Rollover amounts
The last thing to check on to ensure that the SR&ED tax treatment is correct are SR&ED rollover amounts. These rollover amounts will be zero for first time SRED filers and generally also zero for companies which did not claim SR&ED in the prior fiscal year.
The first and most significant rollover figure is L435 on the T661, SR&ED ITC’s applied and/or refunded in the prior year. This amount will be L540 from the prior year’s Schedule 31, Investment Tax Credit – Corporations..
The final rollover figure to verify the taxation of the prior year provincial credit proxy amounts. In Ontario, this is the proxy amounts for the OITC and ORDTC credits. This amount, if applicable is entered on the Schedule 1 on L605/295, xITC related to PPA per ITA 12(1)(x). This amount is equal to the prior year proxy portion of the provincial tax credits (OITC and ORDTC in Ontario). To check this figure, go to the prior year Schedule T661. Calculate the difference between L513 provincial government assistance (with proxy) and L429 provincial government assistance (no proxy).
That’s it, you are up to speed on SR&ED tax and accounting treatment!