Webinar: Everything You Need to Know to Claim SR&ED Tax Credits
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During the "Everything You Need to Know to Claim SR&ED Tax Credits", Jeff Christie discussed: -What the program is -Who qualifies and what can you claim -How credits are calculated -What you need to be doing now to increase your chances of a successful claim
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Webinar: Everything You Need to Know to Claim SR&ED Tax Credits
- 1. EVERYTHING YOU NEED TO KNOW TO CLAIM SR&ED TAX CREDITS Presented by Jeff Christie, Partner, Boast Capital
- 2. OUTLINE I. Overview of the SR&ED Program II. Benefits of Claiming SR&ED III. Case Study IV. CRA’s Requirements V. Do’s and Don’ts VI. Q&A
- 3. I. OVERVIEW OF THE SR&ED PROGRAM
- 6. QUALIFYING CRITERIA Must meet three criteria to qualify for SR&ED: 1. Technological Challenges 2. Technological Uncertainty 3. Technical Content or Iterations
- 7. ELIGIBILITY The CRA’s 5 questions: 1. Was there a scientific or a technological uncertainty that could not be removed by standard practice/engineering? 2. Did the effort involve formulating a hypothesis specifically aimed at reducing or eliminating the uncertainty? Continued…
- 8. ELIGIBILITY 3. Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypothesis? 4. Did the process result in a scientific or technological advancement? 5. Was a record of the hypothesis tested and results kept as the work progressed?
- 9. EXAMPLES
- 11. WHO CAN CLAIM? SMEs = defined as generating less than $500K taxable net income in the prior fiscal year.
- 12. SR&ED BENEFITS Return rates for SME CCPCs:
- 13. SR&ED BENEFITS Return rates for non-CCPCs:
- 14. III. CASE STUDY
- 15. CASE STUDY § Software company with operations in Vancouver (non-CCPC) § 7 developers (1 front-end, 6 back-end) § Salaries are $75K per year and ~65% of time is eligible
- 16. CASE STUDY § Front end development not typically eligible § Eligible expenditure pool for salaries would be ~ $292.5K ($75K x 65% x 6) § Proxy overhead method and non-CCPC rates of return § ≅$93.6K worth of investment tax credits (ITCs)
- 17. CASE STUDY If this was a CCPC, the company would receive $187.2K worth of refundable ITCs (aka cash!)
- 19. TECHNICAL DOCUMENTATION CRA requires that SR&ED documentation must: § Have been documented at the time the work was completed § Highlight technical obstacles or challenges § Be dated
- 20. TIME TRACKING
- 22. WHEN TO CLAIM? 18 Months Past Fiscal Year End § Current Claim = Within 6 mo § Amended Claim = Within 7 to 18 mo
- 23. TURNAROUND TIMES From receipt of a complete claim: § CCPC Current Claim – 4 months § CCPC Amended Claim – 8 months § Non-CCPC Claim – 12 months
- 24. CRA REVIEWS CRA Review ≠ Tax Audit Multiple types of Reviews: § Desktop § Financial § Technical & Financial § First Time Claimant Advisory Service (FTCAS)
- 25. IV. THE DO’S AND DON’TS
- 26. THE DO’s Do: § Pay yourself and staff § Start time tracking and proper documentation now § Incorporate your company
- 27. THE DON’T’S Don’t: § Underestimate the importance of documentation § Focus on the business opportunity § Leave SR&EDs claim until the last minute
- 29. JEFF CHRISTIE PARTNER 403 589 2809 | jchristie@boastcapital.com BoastCapital.com | @BoastCapital | @ChristieLuge
Editor's Notes
- Canadian R&D tax credit program administered by the Canada Revenue Agency (CRA) ~95% of claims are considered experimental development In 2013, the government provided over $3.4 Billion in assistance to 22,000 claimants SR&ED returns are called Investment Tax Credits (or ITCs) Federal budget 2015 – nothing’s changed
- Work must meet three criteria: Technological Challenges Technological Uncertainty and how to overcome Technical Content or iterations CRA defines this as “Work performed for the purpose of creating new, or improving existing, materials, devices, products, or processes”
- What’s eligible? Work must meet the three criteria Work must meet three criteria: Technological Advancement Technological Uncertainty Technical Content CRA defines this as “Work performed for the purpose of creating new, or improving existing, materials, devices, products, or processes” Can occur in various industries (both low and high tech)
- Image recognition engine for orthotics Combining existing technology or software that was not intended to work together Developing new software Improving software to work with legacy systems Adapting a product for use it was not intended to be used for
- As well as large and small companies Small to medium sized enterprises (SMEs) are defined as generating less than $500K income in that fiscal year.
- Non-arms length subcontractors Salaries and sub-contractors MUST be Canadian-based Assuming all expenses are paid, SME’s qualify for refundable investment tax credits (or ITCS). This means they get a cheque back from the government
- Foreign owned corporations, publically-traded, or Canadian controlled companies that are earning more than $500K in revenue per year Lowered the federal SR&ED return rate from 20% to 15% as of Jan 1, 2014 ITCs are non-refundable. They are simply tax credits that be carried back 3 years or forward indefinitely. Salaries and sub-contractors MUST be Canadian-based Non-arms length subcontractors
- You can leverage SR&ED returns to exponentially grow your team, WITHOUT increasing your expenses or R&D budget.
- Extremely important as the CRA has become very strict on claims that do not fulfill their requirements.
- Technical documentation needs to be: Contemporaneous – documented at the time of the experimentation. Highlight technical obstacles or challenges Dated Examples of technical documentation: Engineering notebooks, Versioning Control on software Iterations, Whiteboard images, Emails. Just be aware. Some agile software development teams have needed to implement a better documentation system for their SR&ED eligible projects. Each company works very differently - we can help you set up an efficient system for your company.
- Recommendations: Track 100% of your time. This goes beyond your “SR&ED specific” projects. Track your admin time, your project management time, etc.
- Share what needs to be tracked from a financial/accounting perspective and give some tips on how to do that
- 18 Months past the fiscal year end Current Filing= 6 Months to file taxes after fiscal year end Amended Filing= 7 Months to 18 month past fiscal year end
- CRA’s success rate at meeting these turnaround times is 96% The deadline for companies with a December fiscal year end is June. So if you have a December year end and you want your claim turned around in less than 6 months, now’s the time to file your claim. The CRA only took 68 days, on average, to process a CCPC current claim in 2012.
- The CRA only reviews SR&ED expenditures and technical work. FTCAS – new service launched Jan 2014, it is an in-person meeting with the CRA to review your first submitted claim and to set you up for success for the next claim. Will get reviewed every 4/5 years Most important way to support a review claim is documentation and time tracking.
- Recommended approaches for claiming R&D grants: Pay yourself or staff (sweat equity is $0 equity) SR&ED require spend / NRC – solid business model Incorporate company and ensure clear IP ownership. Company vs contractor
- I’ll send you a link to access the Ultimate SR&ED Guide. The guide goes into detail on documentation, calculations and more. It’s an interactive Guide that we will update as the program changes The CRA has strict documentation requirements, which we cover in the guide.