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).