Introduction to SR&ED
- 1. Presented by Vijay Kalra,CPA, CA VIJAY KALRA CPA Professional Corporation
- 2. Our Company • Wehave been in the SR&ED consulting business since 2002. • We are full service SR&ED consulting firm with in-house team of tax, accounting and technology professionals. • We have developed a comprehensive “SR&ED centric” tax models for tech heavy CCPC’s and their shareholders • We can provide full in-house support for all of your tax & accounting needs
- 3. What is SR&ED SCIENTIFICRESEARCH AND EXPERIMENTAL DEVELOPMENTSR&ED This program encourages 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. More generous than any other program in the world; It is a firmly established federal program with no budget cap. = The Scientific Research and Experimental Development (SR&ED) Program is a Canadian federal tax incentive program that has been in existence since 1985.
- 4. Introduction to SR&EDProgram The CCPCs ( Non public companies) get cash refunds from this program even if they have no taxable income. Claimants can apply for SR&ED investment tax credits for expenditures such as wages, materials, overheads, and SR&ED sub-contracts. In addition to SR&ED (which is a federal program), most of the provinces provide additional credits applicable to SR&ED claimants located in their territories. The government currently pays out over $5B to over 25,000 Canadian companies. 4
- 5. Who Can ClaimSR&ED
- 6. Things to Remember •SR&ED is not specific to a particular industry. Historically IT and related industries have got a disproportionate amount of money from this program only because of early rapid development in that field. Manufacturing is the most under claimed industry. • SR&ED is activity specific. It is paid to a Canadian company for achieving technological advancement by creating new, or improving existing materials, devices, products or processes. • The program applies to Canadian taxpayers (but includes foreign owned companies duly set up in Canada) for work done on Canadian soil.
- 7. Some Examples ofWhere SR&ED Applies Regardless, SR&ED is not industry specific. IT & Telecommu nications Plastic Moldings & Chemicals Oil & Gas Services and Production Electronics Aerospace Manufacturing & Processing Software Development & Computer Science
- 8. Categories of SR&ED Thework carried out to advance scientific knowledge; it is usually done in university or research institutes purely to gain scientific knowledge To qualify for SR&ED, your work must be fall under one of the following definitions: • Basic research: • Applied research: It is also work carried out to advance scientific knowledge, but unlike basic research, it is done with a specific practical application in view. • Experimental development: This work is carried out to achieve technological advancement for the purpose of creating new, or improve existing, materials, devices, products or processes, including incremental improvements thereto. It is also by far the most common type of SR&ED work. • Technical support activities: It is work carried out by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support of work described in above points that is undertaken in Canada by or on behalf of the taxpayer.
- 9. Three Cornerstones ofSR&ED Technological Advancement Technological Uncertainty Systematic Investigation or Search by Experiment Analysis Technological uncertainties are barriers at your existing level of technology & scientific knowledge that prevent you from achieving your goals. They may arise from shortcomings or limitations of the current state of technology that prevent a new or improved capability from being developed. A measurable improvement or generation of new knowledge to advance your technology base before you undertook systematic investigation or search by experiment analysis The approach includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis through experiment or analysis, and developing logical conclusions based on the results. It means each approach you take to resolve your uncertainty should be a planned experiment based on an idea or concept.
- 10. 4 Easy Questionsto Identify SR&ED Eligibility Involved with the development of a new product or process? Facing significant technological difficulties and challenges? Involved with the improvement of an existing product or process? Investing or plans to invest in the near future, a significant amount of money in technology? Has your company been: If your answer to any of these questions is “YES”, there is a good chance we can help you make a successful claim under SR&ED.
- 11. General Examples thatIndicate SR&ED • Designed, developed or attempted to develop new software/ systems/tools/products/ processes? • Prototyped new products/devices? • Modified an existing technology? • Registered patents and trade marks? • Integrated various databases or applications that don't normally communicate? • Added new features, modified or improved an existing product? • Improved response time of your software application? • Changed a process to reduce costs or to improve manufacturing capabilities/timing? • Created a new product, made improvements or added new features to an existing product? • Incurred costs related to a process, project, or prototype that is incomplete because of unresolved technical problems? • Modified your product formulation? • Automated production? • Modified existing products or machines to new applications? • Machined/fabricated parts/dies using new materials or to meet higher tolerances?
- 12. What Can YouClaim? Claimants can apply for SR&ED investment tax credits for expenditures such as: Salary or wages – For employees who are directly engaged in SR&ED Materials – Materials consumed or transformed in the process of SR&ED eligible expenditures Overheads – All overheads directly incurred during SR&ED process or claimed as proxy on salaries payment SR&ED sub-contracts – Company contracts with an arm’s length party to perform SR&ED eligible work
- 13. Two ways toClaim Overhead Expenses Traditional Method : • Specifically identify overhead expenses • Each expenditure must be explained and the calculations must be presented to demonstrate how your claim was calculated Proxy Method • Simpler alternative • Percentage of SR&ED salaries in lieu of overheads • Do not have to document each expense and produce the necessary paperwork to support your calculations.
- 14. What You Can’tClaim General & Administrative Expenses: • Administration salaries (unless directly attributable) • Patents & trade marks acquisitions • Legal or accounting fees, including annual fees • Interest and other finance charges • Entertainment or convention expenses • Advertising or selling (ask us about OIDMTC) • Membership dues or fees • Fines or penalties • Equipment – cost or lease • Acquisition of building, rent, leasehold improvements
- 15. How Much YouCan Claim in Ontario CCPCs Non- CCPCs SALARIES SUB- CONTRACTORS MATERIALS 68% 35% 44% 42% 22% 27% Apply 35% Federal Rate and additional Provincial SR&ED Rate on eligible SR&ED expenditure Apply 15% Federal Rate and additional Provincial SR&ED Rate on eligible SR&ED Expenditure
- 16. Provincial SR&ED Rates Province/TerritoryRate Expenditure Limit Ontario Innovation Tax Credit 10% Up to $3M Ontario R&D Tax Credit (ORDTC) 4.5% Up to $3M British Columbia 10% Up to $3M Alberta 10% Up to $4M Saskatchewan 10% Manitoba 20% Quebec 14% - 30% Up to $3M New Brunswick 15% Nova Scotia 15% Newfoundland and Labrador 15% Yukon 15%
- 17. Supporting Documents • Yourdocumentation should help you answer the following questions: Based upon a hypothesis developed, • What were the challenges? • What work was performed? • For verification purposes, you must keep dated documentation & evidence of: • Original technological goals • Work carried out & progress made • Conclusions reached CRA wants documents to be contemporaneous and created during SR&ED process.
- 18. Examples of TechnicalDocumentation • Project plan & design documents • Dated reports, developer notebooks, lab books, drawings or charts • Analysis of problems, test data and results • Prototypes • Previous versions of software • Records showing what was done by the personnel claimed • Photographs or videos • E-mails
- 19. Examples of FinancialDocumentation • Records of resources allocated to the project, time sheets, activity records, payroll records • Purchase invoices and proof of payment • Contracts, lease agreements • Accounting records and financial statements • Tax Returns – T2, T-4s, T-4As
- 20. How SR&ED Claimsare Processed by CRA Received by Taxation Centre Completeness Check Risk management - need for review(s)? YES Science/ Expenditure Review NO Cheque/Credit to Company Disallowed IncompleteComplete Claim approved Claim not approved
- 21. SFC – OurClaim Preparation Process Identify the expenditures related to each project Preparing technical summaries for each project Summarize technical & financial reports/data Advise management about optimizing the tax model Filing the claim before prescribed deadlines Remember SR&ED is a tax program . Only trained tax professionals with extensive knowledge of SR&ED can help you maximize benefit from SR&ED program. Corporation Personal for all shareholders/ directors Review/discuss claim with the management Discuss with technology head/project manager Scope & define projects to be claimed 1. 2. 3. 4.5.6. 7. 8.
- 22. SR&ED Funding ConsultantsInc. 70 East Beaver Creek RD, Suite 201 Richmond Hill, Ontario, Canada L4B 3B2 1-888-852-5721 Toll-free (416)893-3415 Direct Dial info@sredfunding.com www.sredfunding.com