The Canada Revenue Agency (CRA) is investing for creation of start-up companies in Canada. As well, the CRA wants to give Canadian companies a leading edge when it comes to developing new technologies, materials and products. One of the ways that they have found to provide further incentive to entrepreneurs is through their SR&ED tax credits program (the T661 claim form). The program allows a certain amount of reimbursement through tax refund to those companies that can make the claim that they have expenses in the field of Scientific Research and Experimental Development. In fact, the CRA claims that nearly 95% of SRED claims are derived from ED alone. This means that as long as you’re involved in the building and improving (even of existing materials, devices, etc.) you can be eligible for a refund.
Who can profit from this? Enterprises can include:
- Sole Proprietorship
- Companies in Partnership
- CCPC and non-CCPC Companies
Your return rate is calculated based upon a number of factors that can include the company’s size as well as the company’s net income. It is also highly advised (as stated in the T4088 Guide) to file the proper supporting documentation as part of your claim. In the event that the CRA investigates your claim, it is likely to get denied without evidentiary support.
Creating Supporting Evidence for SR&ED Tax Credits
It may be advisable to look into software that enables data tracking and work recording. Much like accounting software, your data and work history is recorded along with pertinent information for the research projects that you plan to claim for a refund. It is important to be able to ascertain exactly what /when / by whom work was done. As well, be sure to account for all expenditures that occurred for each individual project. There should be a clear connection between an expense and the research and development project.
Whatever your method: whether digital or manual, documentation is essential for ensuring you receive the full amount of your refund.
What Expenses Can You Claim for a Refund?
Remember that these credits are not bursaries, grants, or vouchers. They are refunds that must be claimed after your initial expenditure. You may be eligible for a SR&ED tax credit refund for expenses from:
Even if your research and development endeavours fail to produce any positive results, you are still encouraged to make a claim. Refunds aren’t calculated based on whether your experiment was a success or failure. As long as research was conducted with a systematic approach and procedure, it is deemed worthy of a claim.
What Expenses Are Ineligible?
It’s important to talk to a financial advisor about the details regarding which expenses are refundable under this program. Things like routine maintenance and troubleshooting are not examples of the advancement of technology or research. Therefore, they aren’t covered. Other examples of projects that aren’t eligible for SR&ED tax credits are:
- Market Research
- Routine Testing of Materials
- Routine Data Collection
- Prospecting or Exploring for Minerals / Petroleum / Natural Gas
As well, the work that subcontractors do is subject to discussion and analysis before it can be considered eligible. Their work must fall under the same category of research and development that the parent company administers.
If you have any further questions about eligibility and your specific situation, feel free to contact Kelid for helpful advice. If you have a question that you feel can help other people in similar situations, leave a comment below.