Materials for SR&ED tax credit are generally composed of substances, raw materials and other components that form the by-product, intermediate product and the final product i. It is very important that you acquire tangible and physical materials for SR&ED. Claiming the cost of materials used in SR&ED work should be carefully taken into consideration in order to maximize calculation of SR&ED tax credit. To claim material expenditures, make sure that you have kept invoices; proof of payments; or shipment documents on file.
The material expenditures must not end up as the acquisition of a land, property and leasehold expenses. CRA considers items such as broken or used lab supplies; cleaning supplies; general utilities such as water, electricity, oil, natural gas, etc.; CDs / DVDs; used lubricants such as engine oil as ineligible material expenses in Proxy method. The cost of such items can be captured as overhead and other expenditures when the claim is filed under the Traditional method.
Two Types of Material Expenditures for SR&ED Tax Credit:
- Materials transformed: This translates to materials that have been incorporated or changed into another material or product as a result of the SR&ED project and that still have some value either to the company or to another party.
- Materials consumed: This refers to all materials destroyed or rendered during testing, experimentations, or trial runs of SR&ED projects and now considered as waste or valueless materials.
Sometimes there is a confusion on allocating the expenses related to material service cost such as “heat-treatment” that has been provided by an external contractor. The heat-treatment process may not be an eligible SR&ED on its own work but the service cost can be captured under material expenditure if the heat-treated materials are needed for conducting SR&ED. There are also some cases that plants and animals can be considered as SR&ED materials if they were part of your SR&ED project. For example, if you use an animal or plant to conduct your work then animal and plant can be consider as SR&ED materials and you can claim the expenses.
There are cases in manufacturing companies that materials are partially consumed in the pursuit of SR&ED. For example, a component, tool or an equipment may be altered in such a way that it can no longer be sold for full value but it does retain some value as a scrap item. In this case, you only the difference between the full value and the residual value of the material is claimable.
Eligible materials can be purchased either from foreign or Canadian suppliers. To be able to claim material expenditures, both types of Consumed and Transformed materials must be paid in full within 180 days after the fiscal year end. Shipping and freight costs can be also included as part of material expenditures if the materials are directly related to SR&ED projects.
Kelid’s professionals hope you have found this information helpful in your efforts to understand and maximize your SR&ED tax credits . If you would like more detailed information, feel free to contact us by phone or email. Please feel free to offer your suggestions or opinions and share it with others.