How much do you know about the SR&ED tax refund? Have you submitted your claims for Canada’s Research & Development tax credit program? Or, you are not sure whether to submit because you have heard all kinds of hearsay about the SR&ED tax refund.
SR&ED, or Scientific Research and Experimental Development, is a program that supports research and development in Canada. The SR&ED tax credit allows cash refund and/or tax credit for expenditures on eligible research and development work which was done in Canada.
Below we highlight 10 tips for filing your SR&ED tax refund.
Tip No.1: Recover Your Cost
The SR&ED program is a cost recovery or incentive program. It implemented to help eligible entity to recover cost. If your research and development expenses are paid for and the R&D meets the requirement, then you can apply for the SR&ED tax refund. Don’t be misinformed by some people claiming it to be some kind of grant or voucher. It is not. It is essentially a tax credit which may or may not be refundable, depending on the type of legal entity and the company size. You can recover cost of Direct labor; Overheads; Materials transformed or consumed, and Subcontractors.
Tip No.2: Claim Your Expenditure
The tip is you can claim if you have spending in your setup. The SR & ED program is meant for a wide range of businesses, including sole proprietorship, partnership and companies (CCPC and non-CCPC). The program is based on expenses rather than revenues. The size of the company is used only to determine the return rate. You need to know your net income before you can determine whether you are eligible. Net income is calculated as profit after tax, which means you must pay your taxes to be eligible. If your net income is below $500,000, then your tax credit will be refundable.
Tip No.3: SR&ED Covers High-Tech and Non-High-Tech sectors
The SR&ED program is not just meant for those probing into the high technology. The program is also open to many sectors, such as those in Food Science, Biotech, Manufacturing, Printing and Packaging, Automation, Oil and Gas, Agriculture, etc. For example, if your research is to increase the speed of manufacturing without affecting quality, then your project may be eligible.
Tip No.4: Not all Research Work Can be Qualified Under SR&ED
There are some activities such as routine maintenance or trouble shooting that no technological advancement is being sought. It is highly important to separate non-eligible from eligible SR&ED activities. Examples of ineligible projects are:
-Market research or sales promotion,
-Quality control or routine testing of materials, devices, products or processes,
-Research in the social sciences or the humanities,
-Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,
-The commercial production of a new or improved material, device or product or the -commercial use of a new or improved process,
-Style changes, or
-Routine data collection;
Tip No.5: Confusion Around Subcontractors’ Work
Most of the time claimants are confused to identify eligible subcontractors’ expenses. As rule of thumb, if subcontractors do not provide any of the following services their expenses may not be qualified:
There are subcontractors that processing materials, tools or machineries such as making tools or treating parts. In such cases, if their work is required as part of experimentation process, their fee would be part of material expenses and tax refund will be higher.
Tip No.6: SR&ED Claims Not Limited To Lab Research Only
The Canada Revenue Agency (CRA) revealed that about 95% of SRED claims belonged to ED or experimental development. In other words, only 5% of the claimants actually performed their research in laboratory settings. As long as the aim of the research is to create new or improve existing materials, devices, products or processes, then you can claim. Therefore, SR&ED is not confined to traditional research in a laboratory.
Tip No.7: Failed Research Outcome is Still Eligible
Many people assumed only research with positive or successful result is eligible for claim application. This is not true because eligibility is not tied to success or failure. Negative research result or experiment which shows the opposite outcome still demonstrates an acceptable outcome, meaning it might be due to some technical challenges. The key lies in a systematic approach and experimental process, not success or failure. If you have conducted your research and experiment with proper procedure and process, then you are eligible, even if your result or outcome turns out to be positive or successful.
Tip No. 8: Technical Advisors Can Prepare Your SR&ED Claims
Accountants can prepare your SR&ED claims but they might not be the best candidate to do the job. Your accountant has to integrate the SR&ED claim form, which includes T661 Part 1 and Part 2 (Sch 32), and the provincial schedule into your company Canadian tax return. You can choose to let your technical advisor do the claim preparation. Most successful claims showed significant emphasis on various aspects such as systematic process, achievements, as well as uncertainty in technology uncovered. In this perspective, most accountants and business consultants might not have the knowledge of the technical aspects of a SR&ED program. Therefore, it is best for you to find someone such as SR&ED technical consultant who is well-versed in the technological aspects and challenges of your R&D efforts. Always consider how much you pay in contingency fees to SR&ED consultants.
Tip No.9: Informal Time Tracking on R&D is Acceptable
Often, first time claimants are worried about the insufficient time tracking or inaccurate record of time spent on a research and development project. There are methods available for you to estimate and backtrack the time expenditure on a project. You are allowed to use records such as emails; snapshots of discussion sessions on whiteboard; and/or dated journals as proof of your time spent and tracking. A SR&ED expert can guide you to prepare organized, contemporus, and dated supporting evidences and documents
Tip No.10: Audit of SR&ED Claims is Confined to Review of SR&ED Content Only
Apparently, many eligible companies are reluctant to submit their SR&ED claims because they assume once their claims enter into the review process their company’s accounts will also be audited. This is simply not true. Audit of claims submission is carried on SR&ED related expenditures and technical contents only.
Conclusion: The above 10 tips show that many fears for not submitting SR&ED claims are unfounded and a result of misinformation. Take stock of your research and development project and proceed to claim what you deserve.
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