Get a higher SR&ED return with the track and stack method

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Knowing how to properly calculate eligible expenditures while still maximizing your SR&ED claim is something every consultant worth their salt can do for their clients. SR&ED claims get significantly more complex when you are applying different provincial and federal SR&ED rates, as well as considering other financial assistance you have received within a given fiscal year. That’s where a more dynamic approach called “tracking and stacking” comes in.

The SR&ED program is administered at both the provincial and federal level. The maximum Investment Tax Credit (ITC) at the federal level is 35 per cent, and the provincial programs range between 10 and 20 per cent. Used together, these are “stackable” credits and can be applied to the same expenditures to generate a higher combined rate.  In Alberta, for example, the 35 per cent federal and 10 per cent Alberta SR&ED credits are stackable for a combined effective credit rate of 41.4 per cent when the government assistance rules are applied (the 10 per cent provincial credits are treated as assistance, and thus the federal rate of 35 per cent is only applied to 90 per cent of expenditures.)  Stackable credits have more value than non-stackable credits.

There are many types of government assistance that affect the size of your SR&ED claim. Once you determine the source of the funding, you must also consider if the assistance was applied to the expenditures being claimed. The payback terms are also a determinant in how it must be accounted for and this is where tracking comes into play.

An example is when a forgivable government loan is repaid in a future year.  If that loan had been stacked with SR&ED credits, it can be added to SR&ED Qualified Expenditures in a future year when it is repaid, thereby earning future SR&ED credits.  The idea is to keep track of the incentives throughout their lifecycle with awareness of the consequences of future events.

One of the common mistakes that SR&ED claimants make is subtracting government assistance directly from the pool of available expenditures for SR&ED. It’s important to understand if the applicable funding sources are “stackable” – meaning they can be subtracted from your base expenditures rather than directly from your SR&ED expenditures.

Planning ahead and considering the interaction of different sources of funding along with the costs (be they financial or restrictive covenants) can lead to more effective and efficient project funding.

At BeneFACT, we provide comprehensive SR&ED services, from claim preparation and filing, to supporting claim justifications. We are Canada’s largest independent SR&ED firm with a full-time staff of over 60 employees. If you have any question(s), please do not hesitate to give us a call toll free at 1-855-TAX-BACK (829-2225).

3 need-to-know facts about OIDMTC

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The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit that allows companies to claim a 35-40% tax return rate on eligible expenditures related to the development of interactive digital media (IDM) products. In 2013-14 alone, the Ontario Media Development Corporation (OMDC) certified over 1100 products, amounting to $68 million in tax credits. If you’re thinking about applying to the program, there are a few things you should be aware of that will increase your chances of success.

The types of products that are eligible have changed

OIDMTC was first put in place in 2005, and the guidelines for eligibility were established to allow for exploration in a nascent industry. Previously, IDM products had to have a primary purpose of entertaining, educating, or informing the user to be eligible. The program was recently changed to only include entertainment products and educational products for children aged 12 and under. The development requirement previously indicated that the applicant must prove they were responsible for 90% of work related to “product development,” a nebulous guideline that could be left up to interpretation. The new rule states that the applicant must prove they were responsible for 80% of “product development expenditures,” composed of eligible remuneration and wages (25% of which must be attributable to wages.) Restrictions on promotional products were also tightened, and companies are now obligated to prove their eligible products have a revenue generating stream, including subscriptions, fee-for-use, in-product purchasing, and third-party advertising. For more information about the recent changes, read our last blog post about OIDMTC.

The companies that are now excluded can still claim retroactively

Companies who haven’t applied to the program previously may be reading the new rules and think they missed their shot. If you have products that were previously eligible under the former rules, you can still claim expenditures occurring before April 23, 2015. OIDMTC claims can still be submitted for any fiscal year within three years of the Notice of Assessment date for that particular fiscal year. The 80% development rule is being applied retroactively, but the primary purpose and promotional rules are not, so keep that in mind when doing your calculations.

It’s one of the largest digital media tax credit programs in Canada, but also one of the most complex

Provinces across the country have digital media tax credit programs, but Ontario is one of the most influential in terms of fostering growth in the IDM sector. Major game studios like Ubisoft and Electronic Arts have established development studios here in an effort to take advantage of the lucrative tax incentives and grant opportunities. Determining project eligibility in addition to calculating eligible expenditures can be a complex and multifaceted process, especially in light of the recent changes. The chances of success for an application are increased when you have experience applying in the past and understand the common pitfalls that many companies make.

All over Canada, provinces are focused on strengthening and sustaining the IDM industry. At BeneFACT, we have a dedicated team who can help you apply for these tax credits. To learn more about digital media tax credits in your province, call us toll free at 1-855-TAX-BACK (829-2225).

SR&ED audit survival tips: Justifying the scientific process

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When the Canada Revenue Agency (CRA) instigates an audit related to a particular SR&ED claim, the first step they take is to issue a request for information (RFI.) Claimants who do not have the right documentation exhibiting their scientific process at the ready are at a higher risk of getting their claim denied.

Claimants typically have 30 days to respond to an RFI, but responding at the eleventh hour indicates to the CRA that the process undertaken to prepare the claim may have been deficient. This can often lead to a more detailed review and a site visit by a Research and Technology Advisor (RTA) and / or a Financial Reviewer (FR.) The expectation by the CRA is that all the supporting documentation and evidence has already been collected, reviewed in detail, and organized during the claim preparation process.

In instances where a claimant has indicated on the S60 that they retain certain types of documents, but when the CRA requests to see those documents they are not provided or not available, this will significantly raise the risk profile of the claim.

The likelihood of a review is certainly higher if the technological uncertainty, systematic investigation or search, and technological advancement are not clear or non-existent in the S60 project descriptions. Excess “fluff” about features and functionality as well as “look-around-the-corner” technological uncertainties (“we did not know how to do it” or “this has never been done before”) should be avoided. Context about the business project should be minimal or completely removed. The focus should be on the scientific principles and experiments, not the business objective or product.

A landmark case which outlines the requirements for determining whether work qualifies for SR&ED was Northwest Hydraulic Consultants Limited v. The Queen (“Northwest Hydraulic Case.”) They made some key assessments in favour of claimants regarding documentation of the scientific process:

Keeping contemporaneous records and verbal testimony

It has been determined that for scientific investigation to have occurred, documentation must have been consistently maintained throughout the process. That said, the claimant isn’t obligated to provide one singular and all-encompassing document, and records may take multiple formats to meet the criteria. Verbal testimony can also be considered as a legitimate means to support a claim when determining the “totality of the evidence” in relation to SR&ED criteria.

The results you achieve matter

In the Northwest Hydraulic Case, it was determined that the achievement of a technological advancement is sufficient grounds to infer and conclude that SR&ED has taken place.

Repeatability is not the definitive test of evidence

Another landmark case was RIS Christie v. The Queen, which involved a Tax Court of Canada ruling that the claimant did not produce sufficient evidence showing scientific investigation and technological advancement. This ruling was later overturned by the Federal Court of Appeal, which asserted the need for a more balanced test of the evidence than “repeatability,” on the grounds that making the nature and detail of the documentation a definitive proof was to do a disservice to the validity of “all other evidence pertaining to scientific research.” The Income Tax Act (the “ITA”) defines records as “an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containing information, whether in writing or in any other form.”

This definition is broad enough to include the kinds of supporting evidence claimants normally retain to substantiate their SR&ED claims.

Whether you are a first-time claimant or have claimed SR&ED in the past, BeneFACT provides comprehensive SR&ED services from claim preparation and filing, to supporting Claim Justifications. We are Canada’s largest independent SR&ED firm with a full-time staff of over 60 employees. If you have any question(s), please do not hesitate to give us a call toll free at 1-855-TAX-BACK (829-2225).