Canada’s SR & ED Program(Scientific Research & Experimental Development)

Prepared By

RDP Associates Inc.

Christopher Bodnar

cbodnar@rdpassociates.com

Background

Largest tax incentive program in Canada

Each year, the SR & ED program provides over $4 billion to more than 18,000 claimants

50% of SR & ED eligible companies in Canada are not claiming

The average claim is typically around $150,000.00

Cash or tax credit for money spent on SR & ED (filed with Federal corporate tax returns)

Depending on company structure , credit may be 41.5% to 68.5% on money spent / expenditures incurred

How the program is used

Spending money on eligible R & D (Research and Development)

Claims are filed each year end preferably with financial statements and tax returns

Claims are processed through the CRA

Refunds are based on eligible expenditures incurred by the company

Claims must be filed within 18 month’s of your fiscal year end

Returns are received within 120 days of filing for CCPC’s and 240 days for larger corporations

Industry Eligible's

Software/IT

Automotive

Environmental

Food Sciences

Pharmaceutical

Dental

Chemical Transportation

Electronics & Optics

Telecommunications

Breweries

Forestry, Mining & Agriculture

Manufacturing

Plastics

Textiles

Farming

Automotive

Environmental

Food Sciences

Material Development

Machinery & Equipment

Tool & Die

Construction

CRA Program Objectives

Encourage R & D in the private sector

Increase Canada’s competitiveness in the global markets through innovation

Retain skilled labor within Canada

Influence and create Canadian employment opportunities for new graduates

Support Canada’s goal to faster, greater productivity

Qualified SR & ED Expenditures

Salary and wages

Overhead

Materials

Capital Expenditures

Consulting Costs

New or improved products

Design improvement

Field specific applications

R&D performed in house or contracted outside

Existing process modification New process development

What Qualifies SR & ED

Prototype development

Development or creation of new algorithms

Functionality issues in new code architecture

Field specific applications

Integration into legacy hardware or into legacy software

Who can claim?

Established entities in Canada including:

Qualified Canadian Controlled Private Corporations (CCPC’s) – Refundable

Private, Public and Foreign Owned Corporations – Non-Refundable

Three SR & ED Criteria

Technological Advancement:Is the discovery of knowledge that advances the understanding of scientific relations or

technologies through experimental development.

Technological Uncertainty:Exists if a scientific or technological objective cannot be achieved, or it is not known how

to achieve , based on what is generally available.

Systematic Investigation:Is the documented work evident of investigation, experimentation, and/or analysis by

industry qualified personnel .

Form T661 (claim for SR&ED)

Form T2 SCH 31, ITC for Corporations

Technical study

Documents required to file for SR & ED

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Benefit of Using an SR & ED Tax Professional

Proven developed and implemented systems to capture and report on both technical and financial aspects of the SR & ED claim.

Assist with the preparation of the technical report describing the eligible projects to accompany your financial information to the CRA.

Assist with the science and financial audits by the CRA.

Maximize your claim while minimizing the time required by your in house professionals, allowing you to focus time and money on your core business. Less likely to have your claim challenged or reviewed.

Industry wide knowledge giving you the competitive edge.

SR & ED Tax Credits

Phase out of 35% rate for CCPC’s applies for:

Taxable income in excess of $500,000 Taxable capital in excess of $10,000,000

ITC rate on total expenditures up to expenditure limit

35%35%

20%

20%

Refund Rate

100%40%

----

40%

Type of Entity

CCPC’s

Other corporations

Individuals and unincorporated

businesses

ITC rate on total expenditures in

excess of expenditure limit

20%20%

20%

20%

Nature of expenditure

CurrentCapital

Current and Capital

Current and Capital

Recent Legislative Changes

SR & ED carried on outside of Canada: “Foreign” wages limited to 10% of total wages

Ontario taxable income must equal federal taxable income

Common Ineligible Activities

Market research and sales promotion

Quality control and routine testing

Human or Social Sciences

Prospecting, exploring or drilling for minerals, petroleum or natural gas

aesthetic style changes

Routine data collection

Basic Research: An advancement of scientific knowledge without a specific practical application

Applied Research: An advancement of scientific knowledge with a specific practical application

Experimental Development: A technological advancement for the purpose of creating a new or improved product or process(es)

SR & ED

Identifying Eligible SR & ED Activities

Were industry professionals i.e. Engineers involved in the project?

Were applications created for patents?

What is the industry?

Does the product or process have to meet new changes to industry standards?

Did the company retain intellectual property rights to any subcontracted work?

Is the company trying to develop a new process or product with no novel benchmark?

Is this a improvement that requires new technologies to succeed?

Did the company endure any failures along the way?

Identifying Allowable Expenditures

Traditional:

Attributed overhead expenditures are allowed (Rent, taxes, utilities, etc.)

Proxy:

Rather than calculating attributable overhead expenditures, 65% of labor is added to eligible expenditures.

Proxy Method

A predetermined amount (65%) is calculated, based on SR & ED salaries and wages for T4 employees

The proxy amount represents SR & ED eligible overhead expenditures

Overhead expenditures are not to be included in the SR & ED claim

Selection of proxy method within the year is irrevocable for that year

Proxy Reflects Following Expenditures

Office supplies

General purpose office equipment

Utilities

Support staff salaries or wages

Travel and training directly engaged in SR & ED

Property taxes

Maintenance/ upkeep of SR & ED premises, facilities or equipment

Any other exp. directly related to the prosecution of SR & ED that you would not have incurred if the SR & ED had not occurred

Salaries & Wages

Experimental work and analysis

Chart, graph preparations, calculations and recording measurements

Eligible work performed in respect to engineering or design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research that falls within the parameters and is directly in support of eligible SR & ED work

Materials Consumed

Materials rendered virtually useless as a result of the SR & ED (e.g. Prototype)

Materials not kept in inventory for future use, custom product or commercial asset

Material was used in experimental production, from which no units were sold

“Prescribed Expenditures” Do NOT Qualify For ITC

Administration salaries not directly associated with SR&ED projects

Fees including annual, legal or accounting

Interest and other related fees

Entertainment

Advertising or marketing costs

Membership fees

Documentation CRA insists on seeing documentation that demonstrates a logged sequence

of events of the work being carried out for the purpose of SR&ED

Potential sources of evidence of technological advancement, uncertainty or content

Feasibility studies, reviews of existing technology, beta products

Internet searches

Search for generally available info

Project plan – objectives, hypothesis, plan, budget, staffing, deadlines

Notebooks and logs

Defect logs

Minutes of meetings

Open issue logs

Documentation

Design, plan sketches, charts

Photographs, videos

Digital voice recordings

Prototypes and sample parts

Internal correspondence (emails, memos)

Personnel qualifications

Corrective action reports

Continuous improvement reports

Test reports

Tryout reports

Contact a Research & Development Professional

Head Office (Toronto)

200 University Ave. 14th Floor

Toronto, ON M5H 3C6

1-416-368-9341

Assisting Canadian businesses connect their innovation to their bottom line for over 20 years!