Applying for SR&ED Tax Credits and knowing how to avoid the pitfalls in doing so will help you reduce the taxes you owe.
Tax credits can substantially reduce the tax you pay each year, but qualifying for them can be complicated. The tax credit for Scientific Research and Experimental Development (SR&ED) is one such credit. It can significantly reduce your tax burden, but it takes a good deal of work to meet the threshold for it.
What is it?
The SR&ED tax credit was created in 2005 to encourage global companies of all sizes and in all industries to invest in Canada. Essentially as a business assistance program, it is administered by the federal and provincial governments to support companies and organizations embarking on activities that they may not attempt otherwise due to the cost or other mitigating factors. The program refunds in excess of $3 billion a year, so not surprisingly meeting the qualifications for this potentially lucrative credit is not easy.
How does it work?
For a Canadian Controlled Private Corporation (CCPC) a 35% refundable credit is available on the first $3 million dollar of expenses and a 15% refundable credit on qualified expenses in excess of $3 million. Most provinces and in particular, the province of Quebec, offer similar refundable credits ranging from 14% to 30%; while most provinces follow the $10 million dollar asset test before rate reduction, Quebec has a $50 million dollar ceiling before rate reduction.
For Non-CCPC, a 15% non-refundable credit is available on qualified expenditures. Often the credit is applied against income taxes due in the year hence providing a reprieve for tax liabilities. Akin to CCPCs, most provinces will continue offering refundable credits for non-CCPCs ranging from 14% to 30%
Depending on the size and type of business, SR&ED incentives can be a deduction against income or tax credits that are refundable or non-refundable depending on your specific circumstances. These credits can be used to reduce your income tax due for the year in which they are claimed, and you can carry them back three years or forward 20 years.
To qualify, your work must meet rather strict qualifications. First, it must be considered either basic or applied research or experimental development. Secondly, it must support one of the following categories:
- Operations research
- Mathematical analysis
- Computer programming
- Data collection
- Psychological research
The CRA created a SR&ED Self-Assessment & Learning Tool (SALT) where you can enter information about your work and see if it qualifies. It also provides a list of the information and records that you will need to support a claim. The details required are lengthy and often complicated, so if you even think you may be doing work that qualifies for this credit, it is important to know what you will need to submit so you can start maintaining the necessary records early in your research.
How can I avoid errors in SR&ED claims?
Some of the terminology used on Form T661 (used to submit a SR&ED claim) is ambiguous, so if you are thinking about submitting a claim, here are some things to keep in mind.
- Make Sure to Submit a Complete and Accurate Form: To avoid processing delays, ensure all required sections of the forms are filled in completely and accurately.
- Provide Sufficient Supporting Information: Double-check that you have all the necessary information to support your claim, including both technical details and financial records. While you may not be required to submit this data with your application, the CRA may ask to see supporting details later.
- Review Eligible Expenditures: Thoroughly review all claimed expenses, including salaries provided in estimates, to ensure they are eligible.
- Clearly Articulate Scientific or Technological Advancement: You will be asked to identify how your work focuses on scientific or technological advancement. Consult the CRA’s eligibility guidelines to ensure your project descriptions fully explain the scientific or technological issue your business aims to address.
- Disclose Other Financial Assistance: You are required to disclose any government or non-government financial assistance your business receives. Failure to report this information can result in processing delays, extended audit times, and potential overpayments that you may have to return.
- Don’t Submit Claims with Inaccurate Information: The CRA has noted an increase in claims containing false information and is on high alert for unsupported claims. It is your responsibility to verify the accuracy of all information, even if you work with a tax professional.
- Respond Promptly to CRA Communications: If the CRA requests additional information or wants to schedule a meeting to discuss your claim, respond promptly. Timely communication will help ensure smooth claim assessment and processing.
Applying for the SR&ED claim is a wonderful way to reduce your taxes and increase the money you can invest into your research and company as a whole. It is, however, a complicated process that requires thorough record-keeping. If you want assistance with this or any other tax credits, we are more than happy to consult with you. We have helped clients apply for – and receive – substantial credits in the past and are happy to help you do the same. Reach out to our tax department to set up a call or meeting to discuss your innovative work.