Only a few business owners have not heard of the Scientific Research and Experimental Development Program or SR&ED. Still, not many have successfully claimed for SRED refunds. They either fail to submit an application believing that they do not qualify or were not prepared enough and fell short in their attempt.
This SRED Guide will help you avoid both situations. After you read this article, you will gain a deeper insight into this generous tax incentive program, find out if your business is eligible, and learn the basics of how to apply.
It is important to note that consulting with a fund finding expert like EVAMAX is still your best option. Companies such as EVAMAX specialize in government grants & incentives like SRED and will put you in the best position to submit a successful claim.
Nevertheless, this article will help you take the first and most important step: deciding to go for the SRED tax credits. It will also help you negotiate the complicated process of SRED Ontario, which is a very generous government grant for Canadian businesses.
What is the SRED Refunds Program?
The SRED program is a federal tax incentive program administered by the Canada Revenue Agency or CRA in behalf of the Canadian government. It is one of the many ways that the government encourages Canadian businesses to engage in research and experimental development.
If you run a small business and feel that the SRED is not for you, think again. Of the $3 billion or more that the SR&ED program gives every year, 75% go to small businesses across all sectors. As long as you invest in R&D and are involved in eligible scientific research and experimental projects, you can apply for SR&ED tax credits.
How Can Businesses Benefit from SRED?
The SR&ED refund program is perhaps the largest incentive program from Canada’s federal government. Every year, it helps over 20,000 businesses conduct scientific research and experimental development projects.
Without SR&ED, many of these businesses would not be able to do R&D work on their own. It means that, absent the SRED tax credit, technology and innovation among business sectors will remain stagnant, and Canada’s economy would not be viable for very long.
There are three ways that eligible businesses can benefit from SRED refunds:
⦁ Through an SR&ED investment tax credit
⦁ An income tax deduction
⦁ A refund for eligible expenditures
What Expenses Are Eligible for SR&ED Claims?
The SR&ED tax incentives can be used to cover various eligible costs:
Salary and wages. The SRED tax incentives program covers salaries and wages of employees directly engaged in the eligible project, including the following:
- Taxable benefits
- Profit-based compensations
- Inducements and non-competition payments
The SRED refunds for salaries and wages can be computed by proxy method or traditional method. If you use the traditional method, you can include the salaries and wages of those supervising or supporting the SR&ED work.
Materials for SR&ED
According to CRA’s guidelines, the term “materials” applies to raw materials, substances, and other items that are relevant to the SRED process in two ways:
- When materials are consumed while doing the SRED work
- When materials are transformed during the SRED process
Whether you use the proxy or traditional method, the material cost involved must be an expenditure of a current nature instead of a capital nature. Some examples of capital expenditures are the purchase of equipment, data, or software license. These and similar material costs are not eligible for SRED.
SRED Contracts on Behalf of the Claimant
Qualified businesses can carry out the SRED work in-house, through a third party, or with the help of other entities such as schools and not-for-profit SRED corporations.
If you lack the skills or facilities and decide to hire a third party, you can claim 80% of the expenditures through SRED refunds. The company you hired could also submit a claim, but their eligible expenditures would be reduced to prevent duplication of SRED benefits.
The overhead cost specific to the SRED tax credits is different from the generally accepted term in accounting principles used across Canada. For SRED, overhead costs refer to expenditures resulting from the pursuit of SRED activities as outlined by the SRED’s policy.
Costs stemming from the provision of premises, facilities, and equipment needed to execute the qualified project are SR&ED refundable.
These guidelines are discussed more thoroughly in Form T661, which the official SRED expenditure claim form. Expert fund finders such as EVAMAX could help you with this.
Aside from contract expenditures incurred from hiring other entities to do SRED work, the program also covers third-party payments. However, it can be hard to tell the difference between the two. There are five ways to know if you are dealing with one or the other:
- Third-party payment applies if the performing entity controls the project. If the Claiming party is in control, then contract expenditure applies.
- If the right to exploit the results of the project is exclusive, it falls under contract expenditures. If it is non-inclusive, it is classified as a third-party payment.
- If there are two funders or more, it is deemed a third-party project. Otherwise, it falls under the contract expenditure.
- If the SRED project is commercially focused, then it falls under contract expenditures. Basic or applied research is considered a third-party project.
- If the tax is accrued, it generally falls under contract expenditures. If the tax treatment is on a cash basis, the third-party payment applies.
Who Are Eligible to Apply?
Businesses across all sectors can apply for the Scientific Research and Experimental Development or SR&ED. However, different types of companies will have different ways to access it. Additionally, the amount they can get in the form of an investment tax credit, income tax reduction, or direct refund will also vary.
Private Corporations Under Canadian Control
As defined by the CRA, a Canadian Controlled private corporation or CCPC is a company that has been up and running in Canada since 1971 and is being controlled by a resident of Canada. Also, it must not list its shares outside of the country.
Qualified CCPCs could earn a refundable ITC amounting to 35% of eligible projects worth up to $3 million.
For CCPCs that meet the criteria for a qualifying corporation, a refundable ITC of 15% for over $3 million is added, and 40% of the ITC can be recovered in the form of a tax credit.
Individuals (Proprietorship) and Trusts
Proprietorships and trusts with eligible projects can apply for the SRED tax credits. If they qualify, they could get up to 15% worth of tax credits for eligible expenses. If the tax credit surpasses the tax payable, 40% of this amount can be accessed in the form of a refund.
Companies not classified as CCPCs can still apply. If their projects qualify, they get a non-refundable tax credit amounting to 15% of the eligible expenditures.
Members of a partnership that do not pay taxes could not earn a tax credit directly. Still, those with projects eligible for SR&ED are encouraged to apply. For eligible claimants, the tax credit would first be computed at the partnership level before being allocated to qualified members.
What Documents Are Required When Submitting an Application?
The type of supporting documents required will depend much on the nature of SRED work being carried out. These are general information and record of various forms proving that SRED work was done in the year resulting in qualified expenditures. Below are some examples:
- Documents showing project planning
- Documents indicating the design of the experiment
- Technical drawings and design documents
- Laboratory notes and project records
- Records or trial runs
- Test protocols, data analysis, and conclusions
- Photographs and videos showing SRED work
- Proof of payments and accounting records
It is best to keep all documents and evidence to support your claim. If the CRA selects your project, a committee will review all of them.
The complex application process can be discouraging, especially if you are a first-time applicant. It is best to submit an application with the help of CRA and a fund finding expert like EVAMAX.
How to Submit an Application
Interested parties must include a completed Form T661 when filing for an income tax return. You can provide technical information using this form. Qualified SRED expenses will also be calculated in the T661 Form. For corporations, Form T2SCH31 is needed on top of Form T661. For individuals, you must submit Forms T2038 and T661.
You can use Form T4088, which is a guide to Form T661. Fund Finding experts like EVAMAX can help you make sense of all the relevant forms and the entire application process.
Take the First Step
Are you ready to take the first step toward reduced R&D costs and a more innovative business? Let EVAMAX help you navigate the complicated SR&ED application process. EVAMAX specializes in SR&ED refunds and other government grants in Canada.
Give us a call and be one of Canada’s innovative businesses who have benefited from the SR&ED.