Maximizing Your SR&ED and Digital Media Tax Credit Claims

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We often encounter companies who are not aware they are eligible for both the Scientific Research and Experimental Development tax credit (SR&ED) and provincial Digital Media Tax Credits (DMTC). Information Technology companies that build digital media products can often be eligible for both, but they may not explore both options for a variety of reasons – time constraints, budget constraints, uncertainty about the application process, or the misconception that they aren’t eligible. The programs are quite different, but together they constitute considerable claim opportunities.

DMTC is, in most cases, a refundable tax credit for eligible expenditures related to eligible products – essentially, wages and remuneration for interactive digital media (IDM) products. The definition of IDM varies for each province, but commonly claimed products include digital games and e-learning platforms. For SR&ED, instead of assessing the end product, it’s about evaluating the technological uncertainty involved in the work and the scientific processes being used to solve the problem.

With the exception of British Columbia, government regulators allow companies to submit claims for both programs. Here are three things you should keep in mind when applying for SR&ED and DMTC together:

You can’t claim the same expenditures

The government doesn’t allow double-dipping with their various tax credit and incentive programs, so you can’t claim the same hours on SR&ED and DMTC. SR&ED has a higher tax recovery rate (70% in most cases) than the various DMTC programs, but some development expenditures may not be classified as R&D expenses. Any development work that wasn’t claimed on SR&ED (content development, for example) can likely be claimed for DMTC. Subtracting the expenses claimed on one application from the other can add a layer of complexity to the process, but it’s well worth the effort.

If you already applied for SR&ED and not DMTC, it’s not too late

SR&ED is claimed annually with an 18 month deadline from the fiscal year end, while most provincial DMTC programs are claimed in the tax year following the product completion date. For DMTC, there is usually a longer look-back period, allowing you to claim products that you think are off the table.

SR&ED is focused on innovation, while DMTC is focused on commercialization

R&D and commercialization are very different things, but they are both challenges that all companies need to address. This is part of what differentiates the two programs: SR&ED does not require a completed product, while DMTC often does; SR&ED claims are focused on innovation, while DMTC is more encompassing (sometimes allowing companies to claim marketing and distribution expenditures.) Both are invaluable resources for companies to get the additional funding they need to go global.

BeneFACT Consulting Group is Canada’s largest independent SR&ED firm with a full-time staff of over 60 employees. We have dedicated departments for both SR&ED and DMTC, simplifying the process for claimants who are eligible for both programs. If you have any question(s), please do not hesitate to give us a call toll free at 1-855-TAX-BACK (829-2225).

4 Key Questions Every SR&ED Firm Should Be Able to Answer

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The Scientific Research & Experimental Development (SR&ED) tax credit program is a much needed financial resource for many Canadian companies. Recently, changes in SR&ED policy and interpretation (or lack thereof) of the Income Tax Act has made it increasingly difficult for firms to see a return on their investment, with more claims getting reduced or completely rejected. Many companies whose SR&ED claims are negatively impacted do not know the process to appeal the decision and are left without recourse. These same firms are no longer motivated to file for SR&ED and hence miss out on opportunities for future SR&ED claims.

Consultants are a very powerful resource that can assist clients in maximizing their SR&ED refunds and defend a claim when it goes through a review. They also assist clients in preparing them to maintain contemporaneous documentation that may be required by the Canada Revenue Agency (CRA) as supporting evidence for a claim. Not all SR&ED consultants provide the same level of service, however, which is why it is important to do your due diligence when researching for the right SR&ED consulting firm.

First, you need to ensure that the consulting firm has several years of history assisting clients in claiming SR&ED. Find out whether they provide support during a review and if the rate is already included in their fees. Our experience has shown that not all consultants will assist in a SR&ED review and if they do, then the consultants may charge extra for this add-on service.  In addition, enquire if the consulting firm handles only SR&ED as their core business or offers a banquet of services like grants, business advisory services, and more. If the firm takes on too many offerings, their services can be diluted and subject to a reduction in quality.

Second, ask the SR&ED firm for client references to validate their experience and expertise.  If the consultants hesitate in providing you with references or suggest that providing references breaches their confidentiality agreement with the clients, then ask to see the agreement. This should in fact be a red flag to the potential client. There should not be any reason why the consultant cannot provide references, if they are a legitimate firm.

Third, enquire about the experiences and educations of their in-house consultants, and if the consultants are full-time or part-time with the firm. This will give you an idea if the firm is a small “mom & pop shop” operating from their basement office or are in fact an established, well-reputed firm.  Either way, you want consultants with both SR&ED and industry expertise, as well as financial experts, working on your claim.

Finally, if the consulting firm supports their clients in reviews, ask them whether the same person that manages their claim also defends them in an audit or if they have a separate reviews team.  It is critical to have a separate department that is focused solely on defending objections and claims in review, as the process can be radically different from filing a claim.  The reviews department must ensure the overall success of the claim and be ready to issue a Notice of Objections and take the CRA to Tax Court of Canada, if necessary.  On the other hand, having one or two people that are managing the claims from the write up to the review may not be able to dedicate enough focus when handing claims and reviews for half a dozen or more clients.  There is a high probability that the quality of service can degrade.

BeneFACT is Canada’s largest independent SR&ED consulting firm. We are ISO 9001:2008 certified, and have over 60 full-time employees and 50 part-time contractors that support the overall SR&ED claim process.  Our in-house consultants have B.A.SC, Masters and/or PhDs in the respective industries they service, with clients all across Canada. Our history of success is recognized by clients and government regulators alike. To learn more about how you can receive a higher SR&ED claim without the headache, call toll free: 1-855-TAX-BACK (829-2225).

Tax Credit Reform: What you need to know about OIDMTC

hand press play button sign to start or initiate projects as conOn April 23, 2015, Finance Minister Charles Sousa announced the Ontario budget, which, along with beer and transit reform, is outlining new rules for the Ontario Interactive Digital Media Tax Credit (OIDMTC). The proposed changes focus on overhauling the program’s primary purpose test and 90 per cent rule.

OIDMTC, introduced in 1998, is a program that allows companies to claim labour, marketing and distribution expenditures for eligible interactive digital media products. It was announced last fall that the program was under review, as it had grown from $2.85 million of tax credits in 2005-06 to $68.26 million in 2013-14. Meanwhile, wait times to receive the certificate of eligibility from the Ontario Media Development Corporation (OMDC) have increased to over 59 weeks in many cases.

Since that announcement, the industry has been buzzing with talk of what changes should be expected. Interactive Ontario held a townhall discussion in February in an effort to mobilize the Interactive Digital Media (IDM) community and discourage the government from making changes that would encroach on gains the industry has made in recent years. After all, the credit has contributed to turning digital media into a $1 billion industry in Ontario and has encouraged big digital gaming companies like Ubisoft and EA to establish studios in the province.

There are three main changes to the OIDMTC program that were announced on April 23rd that companies who are looking to take advantage of the tax credit should be aware of:

  • Only two types of products are now eligible: entertainment products, and educational products for children under the age of 12. Products that inform will no longer meet the primary purpose test, and educational products are limited to producing youth-oriented content.
  • News and public affairs, search engines, and real estate databases have been explicitly excluded from claiming the credit. They had previously fallen into the “inform” category, and their inclusion in the program had been widely debated within the IDM industry.
  • The 90 per cent rule will be reduced so that only 80 per cent of qualifying labour expenditures for the eligible product must be incurred by the applicant in Ontario. Qualifying labour expenditures can still be a combination of wages paid to employees and remuneration paid to arms-length individuals or corporations, but at least 25 per cent must be attributable to wages of company employees.

The changes are focused on decreasing wait times and excluding so-called “outlier” companies who had previously taken advantage of the credit. Interactive Ontario has applauded the Ontario government for preserving its support of legitimate IDM.

“The changes to the OIDMTC in today’s budget will ensure core Ontario IDM companies can continue to invest, hire more young people, and make Ontario a centre for innovation that can compete on the world stage,” Christa Dickenson, Executive Director of Interactive Ontario, said in a statement last week.

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