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January 2016

Claim the SR&ED Tax Credit

How to Claim the SR&ED Tax Credit in 30 Days

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If your company’s fiscal year end is December 31st and you’ve recently found out about the SR&ED (commonly pronounced “shred”) tax credit, June 30th 2016 is the deadline to submit the SR&ED claim for your 2015 fiscal year.  Taking the first few steps towards evaluating your eligibility and organizing your claim accordingly can seem daunting at first, especially within a constricted time frame.  Here are a few simple steps that will show you how to claim the SR&ED tax credit in less than 30 days:

SR&ED Tax Credit 101

To begin, it is worth reviewing that the Scientific Research and Experimental Development tax credit  The SR&ED program is a federal tax incentive program available to a wide spread of businesses that involve aspects of Research and Development (R&D). When determining whether or not your company is eligible for the SR&ED tax program find out, in the context of your company’s technological domain whether your company:

  • Attempted to develop or improve any new or existing products?
  • Attempted to develop or improve any new or existing development  processes?
  • File any patents?

If any of the above questions relate to your business, it might be time to consider applying to the SR&ED program.  To do so, you’ll need to describe work that was done and determine the amount of time spent by your employees on these projects. However, most people can barely remember the details of what happened in their project last week, let alone what happened on February 2015.  Here are 3 simple steps that will help you on your way:

Claim the SR&ED Tax Credit with These Steps

  1.  Start by going over and reviewing key aspects of the projects you have performed within the fiscal year that you wish to claim. Quantify your project in terms of size using time spent by your key technical personnel and develop an ordered list of projects from most time spent to least.  How did your technical personnel spend their time in each of their projects? Were a lot of hours spent because the team uncovered and tried to overcome some technological limitations in achieving the sought after objectives?  If so, these projects would likely be considered as eligible SR&ED projects.  However, if the project team was previously aware of all the steps needed to be taken during the project and just needed to work through these steps, these projects are unlikely to be eligible.  Remember that routine engineering or development work, on its own, is not considered as eligible SR&ED work.

If you’ve identified any projects where technical development work was performed due to a previously known or uncovered technological limitation, well done! You’ve now just identified your eligible activities. Next, you’ll want to identify your supporting activities.  You will use these activities to claim the SR&ED tax credit.

  1.  Identifying the supporting activities involves recognizing the parts of your projects that are, on their own, not considered SR&ED, but are in support of the core SR&ED activities described above. For example, an important part of discovering whether or not a given experimental development iteration overcomes the technological limitation your team faced involves a certain amount of testing. While testing is not considered to be a part of the core SR&ED tax credit, it is necessary in order to validate the development effort and therefore the associated time spent on testing or other testing expenses become admissible as part of your SR&ED claim.  Identify all the technical and project management hours that were in direct support of the SR&ED activities and include those hours as part of their SR&ED projects.

You’ve now identified and costed your core activities and your supportive activities.  The last step before contacting your accountant to prepare the T661 and associated provincial SR&ED claim form is to write up your SR&ED report. Make sure to you understand how your provincial government treats their SR&ED claims.

  1.  The biggest mistake we see when asked to review a claimant’s SR&ED report is the report’s focus on the commercial objectives of the project and not the technological objectives of the project.  An example of a commercial objective would be: “Development of the world’s best travel search engine”.  Rather, a technological objective would be stated as “Development of a semantic search engine with a response performance of less than 0.5 seconds.”  From the title, to the description of the technological uncertainties, advancements and work done, keep the report technical.  While you can use commercial context to help the reader understand your business context, limit this to your opening paragraph.  To give you an example of this, here’s what one of our reports’ first paragraph would look like: “In 2013 Google released it’s new travel website that returned search results in less than 0.7 seconds.  Our travel search engine could only return search results in less than 1.2 seconds.  Given that our travel search engine product was marketed as the fastest in the world, the company needed to improve the search engine’s performance to beat Google’s 0.7 second response rate.”  If such a project existed, the commercial discussion of the project would end there, while the rest of the report would focus on the technical activities performed to achieve the sought after objectives within the technological or financial constraints of the company.

To review

To claim the SR&ED tax credit you should:

  1. Identify your core SR&ED eligible activities.
  2. Identify your supporting activities.
  3. Write your SR&ED reports focusing only on the technical merits of the project and minimizing the discussion of commercial objectives or advancements

One last word of caution:  Do not, under any circumstances, try to claim projects that are clearly not SR&ED admissible.  CRA has cracked down on overly aggressive claimants which only results in increased scrutiny and a lot of time wasted by your key technical personnel on a bogus SR&ED claim.  If you’re not sure whether you have eligible work or not, feel free to contact us at info@profitscience.ca or call us at 514-865-3007 for a free consult.