What is SR&ED / SRED Credits?
What are SR&ED Tax Credits?
SR&ED Tax Credits, administered by the Canada Revenue Agency (CRA) and supplemented by the provinces provide compensation to companies for conducting research and development work in Canada. A common misconception is that SR&ED investment tax credits are not exclusive to large technologically advanced companies doing highly complex R&D. This could not be further from the truth.
Federal government statistics show that over 95% of credits are awarded for experimental development work (ie not classic R&D work). If you design new products or processes, carry out IT projects, or invest to build your stock of proprietary knowledge and best practices, you may qualify for SR&ED tax credits. Failed and abandoned projects also qualify.
Moreover, unlike large or foreign owned companies, small to medium sized businesses in Canada (or Canadian Controlled Private Corporations – CCPC’s) get refundable credits. Whereas non-refundable credits can only be deducted from taxes payable, refundable credits are cash! CCPC’s receive SR&ED tax credits within 60 days of filing via a direct deposit from the CRA. This is a big deal for startups or any company that does not have a tax balance at the end of the year.
A last piece of good SRED news for CCPCs. Your credit percentages are much larger than those for large corporations. Let us take payroll expenses, which are the bulk of most companies’ claims. You receive over 65 cents of SRED credits for each dollar of qualifying payroll. Cash. What about Cisco or Shopify? Those guys have to make-do with less than 28 cents of SRED credits per dollar of qualifying payroll.
The SR&ED tax incentives program is the largest tax credit program in Canada. $3 Billion is distributed to 20,000 companies annually through the SR&ED program. G6 Consulting Inc are leaders in full service SRED consulting. We build your claim, co-ordinate with your accountant, submit your claim and get you your money 100% customer service focus. No excuses. You can contact us for a free no obligation introductory consultation.
Who is Eligible for SR&ED Credits?
SR&ED eligibility is an a frequently discussed topic. There is a lot of nuance, particularly pertaining to the edge cases of qualifying / eligible work and qualifying expenditures. We cover this topic in great detail in our eligibility guide here.
Here are the key prerequisites to look at when determining SR&ED eligibility:
- There must be salary, subcontractor, and/or material expenditures related to the work being claimed
- Work being claimed must be qualifying SR&ED work / SR&ED projects
- 90% or more of the work being claimed must have taken place within Canada
- Salary and subcontractor expenses claimed must be paid to a Canadian entity with a SIN or BN
- The expenses being claimed must have been incurred within the previous 18 months from the fiscal year-end being filed
What Work Qualifies for SR&ED?
Not all R&D work is SRED qualifying work. For a SRED claim to be valid, you must demonstrate that you have carried out “qualifying work”. The definition changes and can get convoluted, but essentially you must have performed experimentation, prototyping, even trial and error to attempt to resolve a “technological uncertainty”. In other words, your project must have faced risk that you could not complete it satisfactorily due to technical obstacles or unknowns.There are secondary requirements. Your efforts should be a systematic investigation. You have some record of your work. But striving to resolve a technological uncertainty is the meat.
An important note on qualifying work. If you have a project which has failed for technical reasons, this likely is SRED qualifying work and it can be fully claimed for payroll, materials, and any subcontract work.
To better illustrate what qualifying SRED work is, let’s take an example. Say you are a software developer. What types of software development work might qualify? Here are a couple tests/examples.
- If your software project lead could go to a technical conference related to your project’s subject matter (Blockchain, computer security, node.js, hybrid cloud architectures, etc.) and present a talk or paper on lessons learned, problems solved, new developments in the space, etc. chances are he is describing SRED qualifying work.
- Another test is risk of project failure for technical reasons. Say you are attempting to integrate two different platforms, environments, or architectures to produce a new, third environment with novel/unique/hybrid properties. You are unable to hire this expertise, so you carry out the work in-house. If there is uncertainty regarding the successful technological completion of your project, this points to qualifying work.
- Tools development is often qualifying work. Say you repeatedly do projects for customers that involves similar steps. Security scans, porting code from environment A to B, etc. If you undertake a project to build a tool to automate a set of tasks or jobs, it is often likely that this tools development represents qualifying work.
- Last software test/example. Say you are developing new code which must operate within a technological constraint that involves scaling. This could be response time under load. Ability to develop code with X functionality that will fit within a given memory or disk constraint. You must build a minimum viable feature set of the app to test it to see if it meets the technological constraint(s). This would probably represent qualifying work.
Qualifying work is often easier to spot in physical projects carried out in manufacturing, engineering, or product development firms. If you are carrying out prototyping work so that you can test an MVP (minimum viable product) against technical requirements or objectives, that is probably SRED. “Shop Floor SRED” is qualifying work. This is when you are engaged in normal production and you encounter a technical problem. This might be as simple as a printing company or a coatings company experiencing quality or adhesion changes in different seasons. If you undertake systematic testing/investigation/work to overcome the technical problem, that is likely SRED qualifying work.
How Does SR&ED Work?
Here’s an SR&ED tax credit example to show the steps involved in claiming an SR&ED tax credit. While self-filing SR&ED is possible, it is wise to have a SR&ED expert consultant, such as G6, handle your SRED. SR&ED consultants do not get paid until you receive your direct deposit from the government. The business is done on a contingency basis.
What is a SR&ED Claim?
The first step is seeing whether your business might qualify for SR&ED money. Calling a consultant to schedule an introductory call can often shed clarity on this. There is no obligation to you or charge for this call. The first requirement for SRED is that you are engaged in a technical line of business. Businesses engaged primarily in retail, legal, marketing, sales, or distribution activities most likely have no ability to make a claim. The verticals that may have SRED-claimable work are broad. Software, manufacturing and process companies, start-ups, wineries, and green firms all widely claim SRED credits. There are several technical verticals where the firms in those lines of business in my experience under-claim SRED. These industries include agriculture, food production and engineering service companies.
If you are in a technical line of business, You likely have performed some SRED qualifying work. Have you developed any new products, or developed enhanced features to existing products? Have you built any prototypes? Have you developed any technology to increase productivity or efficiency in your business? These types of activities are all hallmarks of SRED-claimable work.
SRED credits are claimed for work you have already performed. This makes SRED the opposite of traditional R&D funding mechanisms like IRAP, where researchers write proposals for work they will undertake if they receive funding. A big advantage of SRED is that its provisions are built right into the Income Tax Act. This means that if you meet the requirements for funding, you will receive your credits. There is no competition for available funding between firms, nor is there a pot of money that may or may not have funding after you have qualified. The amount of SRED funding available to you is unlimited.
Your ability to claim SRED credits is time limited. Your SRED claim must be filed within 18 months of the end of the fiscal year during which the SRED work was performed. If you think you may have a claim, do not wait until the end of June to explore your options. With a December 31st year end, you could lose a year’s worth of SRED credits if your claim is not submitted before the June 30th deadline. This could be a loss to you of tens or hundreds of thousands of dollars!
Once qualifying work is identified within the proper time frame, details about your work need to be gathered and work needs to be separated into projects by fiscal year. A write-up of your work which lays out how your work meets the technical requirements for SRED qualifying work, all in less than 1400 words per project is required. One of the final steps of preparing a claim is assigning allowable payroll, material, and subcontract expenses to your project.
Next the SRED projects are transferred onto the proper CRA claiming forms, organized by fiscal year. If claiming SRED for a fiscal year where you have already filed your business taxes, you or your SRED consultant will file the SRED claim as an amendment to your previously filed taxes. Ideally your consultant will co-ordinate with your accountant so that the SRED is filed as part of your annual T2 filing.
For first time claimants, the government schedules a review at your site, typically a month or two after your claim is submitted. The government sends a technical and financial reviewer to learn about your business, educate you about SRED and review your claim to ensure it meets SRED standards. Your consultant is with you during this review, which typically takes a half day to a day to complete. Ideally your first claim is assigned FTCAS status, where the above review takes place, but it is less in depth because your claim has already been pre-approved prior to the review. After a successful review, your SRED credits will be direct deposited into your business bank account within about a month. At that time, your consultant will bill you a contingency fee based on a percentage of the cash you received.
Many companies who get SRED money successfully from the government find that they are doing qualifying work annually. G6 Consulting works with you to make documenting your SRED activities part of your regular workflow. You will file SRED annually as part of your T2 tax return. Processing times for repeat filers are often accelerated with turnaround times of a few weeks rather than months as in the above example. G6 will then work with you to strategize how SRED can be a key component in funding your business success and growth by incenting you to expand your technological expertise and undertake groundbreaking projects.
G6 Consulting SR&ED Resources
- SR&ED Calculator – Find out the dollar value of your potential SR&ED tax credits by inputting your expenditures in our free to use SRED (SR&ED) calculator.
- SR&ED Eligibility – A look at the Who, What, When, Where and Why of SR&ED Eligibility. Also contains more detail on qualifying work.
- SR&ED Credits Accounting Treatment
- SR&ED Examples
- SR&ED Considerations for Engineering and IT -Ensuring that zero ‘double-dipping’ is occurring, capitalizing on opportunities to complete international projects, and optimizing your SR&ED claim.
- Deductions from SR&ED – Things that grind SRED Credits.
- SR&ED FTCAS – The FTCAS means that your claim is pre-approved or accepted as filed.
- R&D vs SR&ED – SR&ED is the portion of your R&D work where you are actively searching and experimenting to overcome.
- How to Calculate your SR&ED – Step by step guide to calculate your SR&ED tax credits.
- SR&ED as a service – We build your claim, co-ordinate with your accountant, submit your claim and get you your money 100% customer service focus. No excuses.