Most business executives are have heard of the Scientific Research and Experimental Development (SRED) program but many don’t realized that some of their initiatives could be eligible to receive SRED tax credits or refunds.
The SRED program was started by the Federal Government in 1985 and has grown to the point that over $2 billion in benefits are paid out each year. Approximately one-half of the $2 billion is paid out to claimants in Southern Ontario. In addition to the federal program, the Ontario government also offers SRED benefits with no additional effort by the claimant. Interestingly, it is estimated that only 20% of all eligible claims are made and filed with the Canada Revenue Agency (CRA). This means that Canadian businesses are leaving a staggering $8 billion in potential benefits on the table each and every year. Is your business one of them? Here are some guidelines to help you determine if you have an opportunity to make a SRED claim.
What is SRED?
The SRED program is a federal tax incentive program to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada that will lead to new, improved, or technologically advanced products or processes. The SRED program is the largest single source of federal government support for industrial research and development and is one of the most generous incentive programs of its type in the world.
Claimants can apply for SRED investment tax credits for expenditures such as wages, materials, machinery, equipment, some overhead, and SRED contracts.
Does My Company Qualify?
Canadian-controlled private corporations (CCPC) may receive up to $700,000 in cash. This is calculated as 35% of the first $2 million of eligible project costs for SRED carried out in Canada. Any expenditure above $2 million will revert to the standard benefit rate of 20%. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an investment tax credit (ITC) of 20% of qualified expenditures for SRED carried out in Canada. In these cases the ITC is used to reduce any taxes owing but is non-refundable. Provincial benefits are in addition to these amounts.
What kind of projects qualify?
What you consider to be research and development may be somewhat different than the type of work that is eligible for federal and provincial tax incentives. Generally, qualifying work is based upon the federal definition of SRED as contained in the Income Tax Act. To qualify for the SRED program your work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel.
Work that qualifies for SRED tax credits includes:
- experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
- applied research to advance scientific knowledge with a specific practical application in view;
- basic research to advance scientific knowledge without a specific practical application in view; and
- support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, but only if the work is commensurate with, and directly supports, the eligible experimental development, or applied or basic research.
Now Tell Me in Terms I Can Understand
The SRED rules can be very complex (which is why the $8 billion goes unclaimed each year) but here are three eligibility criteria, all of which must be met, that will help you in determining if you have a valid claim:
1. There must be a scientific or technological advancement sought. The work you do must generate information that advances the understanding of scientific relations or technologies. In effect, you are seeking to increase your company’s technology database – a departure from standard practice.
2. There must be scientific or technological uncertainty. On the basis of generally available knowledge, you are uncertain as to whether a given result or objective can be achieved. Alternatively, you may be fairly confident of achieving the objective, but may be uncertain as to which of several possible alternatives (i.e. paths, routes, approaches, equipment configurations, systems architectures, circuit techniques, etc.) will work.
3. There must be scientific and technical content. The work must involve a systematic investigation, involving experimentation or analysis (e.g. iterative in nature). The work should be carried out by qualified personnel and should be adequately documented.
Identifying Projects Eligible for Claims
In an ideal world, all projects would be preplanned, appropriately authorized and carried out according to a fixed schedule. Cost account numbers would be assigned and time, cost and technical reporting requirements set-up before starting any SRED project. In the real world, many projects are reviewed for eligibility after the fact – sometimes years after.
Therefore, it may not be too late to review your projects and your best bet is to bring in an expert who can review your projects and quickly determine if there is a potential claim. If we believe there is an opportunity we will do all the work and submit the claim on your behalf and best of all, we only earn a fee if we are successful in obtaining a refund or tax credit.
If you would like to receive a copy of our frequently asked questions about the SRED program, send me an email or give me a call and I would be happy to send them to you.
