Lead to Win Optimizing S R&ED Claims June 23, 2009 Kevin Goheen
SR&ED Program – Overview
Canada’s largest federally supported program for industrial R&D incentives
Program has existed since the 1980’s
Over 19,000 claims made each year
>$4 billion in tax credits
Small and medium companies submit 75% of these claims, generally $20,000 to $2,000,000 in expenditures
SR&ED Program - Overview
Canadian Controlled Private Corporations (CCPCs) can earn refundable 35% investment tax credits (ITCs) on first $3M of expenditures
Public companies (non-CCPC) can earn 20% ITCs, applied against federal tax
10% provincial tax credit for SR&ED performed in Ontario
20% Ontario Business Research Institute Tax Credit
R&D costs CCPCs approx 30 cents/$ expenditure
Individuals can also claim SR&ED
What is R&D Practically ?
Indications that you MAY be doing R&D:
Technical attempts to make things faster, cheaper, better
Lower than average manufacturing yields
Large warranty costs
Each case must be analyzed within the definition of eligible activity
SR&ED – The Concept Slide Point A ‘ base level’ Point B ‘ Technological Objective’ Barriers, Constraints, Uncertainties, Challenges
Lower energy use
Some examples of advancement are:
New architectures, algorithms or database techniques
Performance increases (response time, speed, user or database scalability, reliability)
Interfaces between two or more existing software packages
Development of new in-house development tools
Some examples of advancement are:
New packaging equipment and procedures
Non-routine substitute of materials in injection molding
Eliminating lead based solders in PCB manufacturing
New fuels in cement manufacturing
Emission reduction in cement manufacturing
New hockey tape production equipment
Development of new in-house CAD tools
Developing new machinery to enhance production
Some examples of advancement are:
Development of new pharmaceuticals
New growing techniques for grape vines in cold climates
New endodontic treatments
in many cases; be careful with wording
Service vs. Product
Management of R&D project
SR&ED claims must be submitted within 18 months after the end of every fiscal period
December 31, 2009 is the deadline for submitting claims for fiscal periods that ended on June 30, 2008.
e.g. You can prepare two claims for your fiscal periods that ended on December 31, 2007 and 2008 at same time, and submit them both to CRA before June 30, 2009.
CRA has committed in writing to help fix administrative omissions and errors if received 90 days prior to 18 month deadline.
SR&ED cheques usually arrive ~3-4 months after CRA receives your SR&ED documentation.
However if you have already submitted your T2, it will need to be amended. This will delay your first SR&ED cheque, so it arrives in ~6-8 months. Subsequent SR&ED cheques will likely arrive in ~3-4 months.
The Ontario cheque (used to) tend(s) to arrive a few months later.
Many third parties will lend against filed SRED claims.
Note that there is no filing deadline for the Ontario Innovation Tax credit
New T661 form for YEs after Dec 31, 2008
Hard word limits on various sections of technical descriptions; no pictures or graphics allowed
All projects to be filed after 2010 (not just top 20)
Explicit requirement for contemporaneous documentation
HINT: Not enough space to describe projects, hence will be more audits. Write a long technical description, cut and paste into new form and keep the long form for the inevitable audit.
CRA Web Site Slide
What is Involved in Filing a Claim?
Scoping of projects
Preparation of technical reports for each project
Gathering and analysis of costs
Preparation of tax R&D forms and attachments
Submission of claim by 18 months following the year end
A: Scientific or Technological Objectives
B: Technology or Knowledge Base Level
C: Scientific or Technological Advancement
D: Description of Work in this Taxation Year
E: Supporting Information.
A: Scientific and Technical Objectives
Preface this section with a brief description of the company and its commercial goals.
What did you intend to achieve?
Your work will qualify for SR&ED if you generate new knowledge to do new things and make technologies perform in unusual ways. You must intend to advance knowledge of your subject.
Use numerical goals where possible.
Emphasize the “methods and practices” that you wanted to develop.
For multi-year projects, include a technology roadmap which you probably have from a business plan.
B: Technology Knowledge Base
Describe what you knew internally about the project before beginning and what other companies have done
You are not expected to know “trade secrets” of others.
Area B is very important for software claims, where common knowledge evolves rapidly. Is often challenged at technical review.
C: Scientific and Technological Advancement
Describe what achievements you hope to gain:
“ It would be an achievement if…”
What was difficult? Stress uncertainty. Begin your paragraphs using these phrases:
“ We did not know how to…”
“ We were unsure whether we could…”
“ We could not understand why…”
“ Our problem was difficult to solve because…”
D: Description of Work in Taxation Year
For multi-year projects, described the status as of the first day of the FY
What did your employees and contractors do?
Describe the systematic way they investigated your technical challenges.
Describe approaches they contemplated, but abandoned.
What tests and analysis did they perform?
Described what lessons you finally learned.
Don’t use certain phrases (“trial and error”, “beta version”, “optimize”)
Describe the status of the project on the last day of the FY and, for multi-year projects, your plans for the next FY.
E: Supporting Information
What documents exist?
log books, bug reports
minutes of meetings, etc…
Just the titles. Do not submit copies of the documents to CRA.
List all the contractors and describe what they did very briefly.
New Documentation Requirements X X X X Others X Contracts X X Prototypes, scraps X X Photographs and videos X X Test protocols, data and results X X Progress Reports, Minutes X Trial Run Records X Source Code, System Architecture, etc.. X Lab Notebooks X X X Experiment Design X Time Sheets X Planning Docs Resources Systematic Work Uncertainties Base Level Knowledge
Preparing for your SR&ED Review
Prepare a slide deck from the T661
Rehearse, rehearse, rehearse
Let the reviewer present
Don’t let the reviewer “wander around” your shop.
Silence is your friend; shut up.
Can be extensive
Relationship with IRAP
Advantages of having both
Usually SRED technical review goes better (or doesn’t happen)
Cash flow improves 18 months
Financial risk drops
ITAs are usually on your side; CRA reviewers are not on your side.
Disadvantages to having IRAP
Reduces SR&ED claim, unless you get IRAP to pay for non-eligible activities
e.g. R&D project with $50K salaries, $16.5 contractors, 65% overhead
With $50K IRAP Small Project support, total cost to loss making CCPC is ($5060)
Instead get IRAP to pay for marketing or IP; total cost to company will be ($27,060)
Work in LTW Groups
Define technical objectives
Define technical uncertainty
Define work performed
Thank you! Slide Kevin Goheen, PhD, P.Eng. 613.726.1010 X.227 [email_address]