Is SR&ED Right for Your Business?

Any business leader knows the success of their organization goes well beyond the success of their products. To remain competitive in industries fuelled by innovation, companies need to center their growth strategies around a robust research and development (R&D) program that keeps them ahead of their peers.

When it comes to incentivizing research, the Canadian government has been supporting businesses for decades through various income tax incentives. Today, significant funding falls under the Scientific Research and Experimental Development (SR&ED) tax credit program, which is designed to help offset the costs of R&D for companies. The goal? To encourage ongoing innovation within Canada’s business ecosystem, helping to position Canada as a global technology leader.

However, while many companies in Canada’s tech landscape are likely eligible for the SR&ED tax credit, not everyone applies for this funding. This is due, in part, to a general lack of understanding around who can apply, how much funding they might get, or how to apply for the program within the context of their business.

As a partner with MNP’s SR&ED tax practice, I’m passionate about breaking down these knowledge barriers to help our clients determine if they are eligible and if it makes business sense to apply for the program. Our role is to educate businesses on available funding, assist with developing the strongest possible application for the SR&ED credit, and help build a funding roadmap for the future. With that in mind, let’s start with a quick overview of how SR&ED works.

SR&ED: More than just an acronym

The SR&ED tax credit is administered by the Canada Revenue Agency (CRA), with the goal of helping companies offset spending on basic research, applied research, and experimental development. Each year, CRA grants over $3 billion in credits, in addition to funding provided by provincial and territorial governments.

What does this look like in practice? The potential credit available to a company depends on the type of corporation, and where it carries on business in Canada. For example, a Canadian-controlled private corporation (CCPC) in British Columbia (B.C.) can recover up to 64 percent of salaries and wages, 32 percent of contractor costs and 41 percent of material costs related to eligible activities through a cash refundable tax credit. Non-CCPCs and certain large CCPCs in B.C. can recover up to 36 percent of salaries and wages, 18 percent of contractor costs, and 23 percent of material costs related to eligible activities. The recoveries vary by province and territory.

These numbers might sound appealing, particularly if your company is already investing heavily in R&D; however, before you start filling out the application form, there are a few things to consider.

Preparation is key

Applying for the SR&ED tax credit is no easy feat, so businesses need to make sure the application process is worth the effort.

Before you choose whether to apply or not, you should evaluate:

• The corporation’s status to determine if the claim is refundable
• The eligibility of the company’s R&D activities and costs
• What the tax credit might be worth
• Your team’s estimated effort to prepare and support the applications

This type of financial and technical assessment is critical to determine whether the SR&ED credit is the right option for your organization. Once you have decided that SR&ED funding should form part of your R&D planning, you must ensure there is a process in place to keep track of activities and costs related to R&D projects. This process should become part of your R&D budgeting and tax planning strategy.

The SR&ED application is prepared and submitted annually along with the company’s corporate income tax return. After submitting the application, it is important to be prepared to support the claim and have the right information on hand to ensure the application meets the science eligibility criteria when subject to review by CRA.

If SR&ED funding is something your company would like to pursue, here are a few things to start thinking about:

1. Consult a specialist

As the SR&ED application form is complex, it is a good idea to consult with an advisory team who can help ensure you’re not overlooking any elements of the claim. SR&ED professionals that understand your sector can help you define the role of R&D in your company, pinpoint costs that are eligible, and optimize the quality of your submission.

As a bonus, relying on SR&ED professionals to handle the process means your developers or engineers can spend more time on what they do best: driving growth and innovation.

2. Document your projects

Just like how you save receipts for tax season, you must document your projects so you have the necessary details on hand if your SR&ED application is reviewed. Solid documentation will help you showcase the work done and the dollars spent in your R&D. For any R&D project, make sure the documentation captures the who, what, when, why, and how.

3. Track your costs

It is critical to document all of your company’s R&D costs. While this is something that most businesses already do for reporting purposes, it can be beneficial to reach out to an advisor for guidance on whether you’re tracking the right details to support a SR&ED claim.

Seek support from an advisory team

Working with a team of seasoned advisors with experience in this space can provide a higher level of comfort that your claims will meet the eligibility criteria and simplify the application process for your technical and financial teams, year after year.

To learn more about SR&ED or how MNP could support your company’s SR&ED claim process, contact Terry Trotic, Western Canada SR&ED Leader, at 778.309.4744 or [email protected]