An R&D tax incentive is a reduction in taxes or a refund provided by a country’s government to businesses for conducting R&D work in that country. Canada has the best, most robust R&D tax incentive program in the world for three reasons. First, R&D tax incentives in Canada can be paid out as cash instead of merely functioning as a credit against taxes payable. Second, Canada has the most generous R&D tax incentive program with a higher rebate per dollar spent on R&D than any other developed country. Finally, in Canada, once R&D tax incentives are awarded to companies, they can not be subsequently audited and retracted. Once you get your R&D tax incentives in Canada, they can not be taken away.
In Canada, R&D tax incentives are administered by the Canada Revenue Agency (CRA) through the Scientific Research and Experimental Development (SR&ED or SRED) Program. More than $4 Billion in SR&ED money is distributed to over 20 000 Canadian businesses annually through the program. The SR&ED program provides cash payments and/ or tax credits for R&D performed during a fiscal year. Benefits are delivered through the SRED program after the R&D is performed.
Depending on if the business is a public or foreign-owned company or a private Canadian company (CCPC), the SRED credits can either be non-refundable (a credit against taxes payable) or refundable (SRED grant received as a cash payment from the CRA). Foreign-owned or public companies receive non-refundable credits and therefore need a tax balance to take advantage of R&D tax incentives in Canada. In contrast, private Canadian companies receive refundable (cash) credits as a direct deposit from the CRA when the application is approved. Therefore, these companies do not need a tax balance to take advantage of R&D tax incentives in Canada.
SRED R&D Tax Incentives in Canada are paid out in arrears based on expenses incurred. At the end of each fiscal year, businesses in Canada are entitled to a rebate on expenses incurred while conducting qualifying scientific and experimental development work. These qualifying expenses can be labour expenses for employees (payroll), subcontractor expenses, or materials expenses.
Salary or payroll is the most significant component of most SRED claims. Private Canadian-controlled companies are eligible to receive 65 cents of SRED money for every dollar of qualifying payroll expense. This rate becomes about 40% for materials, and for subcontractors conducting qualifying R&D SRED work, the R&D tax incentive rebate is about 35%. It is important to note that for materials expenditures to be eligible for an SRED rebate, they must either be materials consumed (scrap) or materials transformed (prototyping). Capital expenditures do not qualify.
To apply for SRED R&D tax incentives under these expenditures’ “buckets” (payroll, subcontractors, and materials), qualifying SRED work must have taken place. Qualifying SRED work can be either basic or applied research, or it can be experimental development. Experimental development accounts for over 90% of all SRED claims made in Canada.
Experimental development is any work undertaken with the objective of making an advancement against a technological uncertainty. Many businesses neglect to apply for SRED money due to the false perception that the program is restricted to “high tech” companies doing experimentation in white lab coats. The reality is that almost any company may have qualifying SRED activities going on at any given time. A good general principle is that if some of your staff are engaged in solving technological problems for which a solution is not readily apparent, there is an excellent chance that your business is eligible for SRED R&D tax incentive credits.
SRED consulting experts, like G6 Consulting, will often offer free consultations to help determine if there is qualifying work that can be claimed for SRED. SRED consultants prepare and submit SRED claims on behalf of Canadian businesses. These consultants typically work on contingency; only receiving a percentage of the SRED money received if the application is successful. As there is often no charge for an unsuccessful application, there is minimal risk to the business.
SRED applications are made via otherwise unused forms in a Canadian corporate tax return. The T2 schedule 31 and T661 are the two principal forms used to apply for SRED. However, there are also provincial forms to fill out and alterations to the T2 schedule 1 that must be made. Traditional CPAs will often not work with these forms and instead refer clients to an SRED consultant to access the R&D tax incentive program.
Completing these forms requires an essay-style technical write-up and a financial breakdown of expenditures claimed for R&D tax incentives through the SRED program. The technical write-up is a (maximum) 1400-word piece that requires responses to three questions. Those questions are “What scientific or technological uncertainties did you attempt to overcome?”, “What work did you perform in the tax year to overcome the scientific or technological uncertainties described in line 242? (Summarise the systematic investigation or search.)”, and “What scientific or technological advancements did you achieve or attempt to achieve as a result of the work described in line 244?”. SRED consultants will prepare this write-up for you by learning about the work your business does and then framing it in the best possible light to answer the questions that CRA wants to know.
The financial component of the SRED forms to receive R&D tax incentives in Canada is about assigning expenditures to work performed. For employees, this is about claiming a percentage of payroll based on hours each employee spent doing SR&ED eligible work. For materials and subcontractors, this is an invoice collection exercise to determine which of these expenditures qualify for SRED and which do not. SRED consultants can often complete these forms with very little time required from the business claiming for the R&D tax incentive program.
One thing many businesses ask about is the need to submit supporting documentation. Many are surprised to learn that supporting documentation is not required to be submitted with the SRED application. Instead, on the SRED application, you only declare which supporting evidence you will have to back up your claim. You will only be required to submit the supporting documentation if your claim is selected for review.
The CRA does not publish data on how many claims are selected for review. However, we do have some third-party data that we can extrapolate to determine what percentage of SRED claims are chosen for review by the CRA. Third-party data indicates that 90% of claims are accepted with little to no change. In our experience, when claims are selected for review, there is about a 50% chance that they are accepted with little to no change. This would indicate that roughly 20% of SRED claims are selected for review, and 80% of SRED claims are accepted as filed without a review.
G6 Consulting is a firm that specializes in preparing and filing R&D Tax Incentive claims for private Canadian-controlled companies and public and foreign-owned companies operating in Canada. G6 works on a contingency basis, and we only get paid when you get your money from the government. Reach out to us today to learn more about R&D tax incentives in Canada and how to claim them.