SR&ED: Paying Yourself a Dollar Now Could Earn You Two Dollars Later…

Piggy bank with euro coin stacks - concept of increase

Planning Ahead For Next Year’s SR&ED

Managing your company’s taxable income can more than double your SR&ED benefit by accessing enhanced investment tax credits that are available to small to medium sized Canadian Controlled Private Corporations (“CCPC”) based on certain size and income thresholds. The basic federal SR&ED credit is 15% and is only refunded to the extent that a company paid tax. For qualifying CCPCs, the enhanced rate is 35% and the credit is fully refundable whether the company paid tax or not. That’s a difference of 20%!

How does the enhanced credit work?

The enhanced credit is available to CCPCs on up to $3 million of expenditures – the “expenditure limit” – after which the basic credit is earned. The expenditure limit is reduced when a company’s (or corporate group’s) prior year taxable capital and taxable income exceed certain thresholds. The factor that is manageable in many cases is taxable income. The expenditure limit starts at $3 million. It is reduced at a 10:1 ratio when the prior year taxable income exceeds $500,000 and eliminated when taxable income reaches $800,000. So every $1 of last year’s income over $500,000 reduces this year’s expenditure limit by $10. Or we can look at it from the other side: $10 of expenditure limit (up to $3 million) is created next year for every $1 that this year’s income is below $800,000. A company with income of $700,000 would have an expenditure limit of $1 million the following year.

What can I do to get the enhanced credit?

In many cases, it is possible to “bonus down” to reduce taxable income by paying bonuses to owner operators. Every $1 of bonus paid potentially creates $10 of expenditure limit and an extra $2 of SR&ED ITC. You’ll need to have a general idea of your expected SR&ED expenditures to know how much expenditure limit you’re likely to need so you should consult with your SR&ED advisors. At BeneFACT, we frequently assist clients with this estimate. You’ll also need to coordinate with your accountants so that they can plan for the targeted income number and consider any other factors such as the owners’ personal tax situations and the timing of the bonus declaration and payment.

What about provincial credits?

Only a few provinces are impacted by the expenditure limit. The Ontario Innovation Tax Credit (“OITC”) is a 10% refundable credit that is also tied to the expenditure limit, while the Ontario Research & Development Tax Credit (“ORDTC”) is available to all claimants. In British Columbia and Saskatchewan, refundable vs non-refundable status is impacted (not amount) and Quebec’s Labour Tax Credit (“QLTC”) rate is based on a size test (assets), not income.

* Please click on the image below to open up the table.

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Shredding More Common Misconceptions About SR&ED

Shredding More Common Misconceptions About SR&ED

Are You Sure You’re Getting the Money You Deserve? In our last post, we highlighted some of the common misconceptions that are preventing Canadian firms from taking full advantage of some of the richest R&D incentives in the world, available under the Scientific Research and Experimental Development (SR&ED) tax credit program. We still have several more common misconceptions  to cover. Here it goes:

“I’m an engineer. It’s my job to solve the problems. How can this be SR&ED?” Engineers, technologists, designers and programmers are highly educated, competent and proud professionals. Every day they tackle technical challenges and obstacles associated with their products and processes. Sometimes, these obstacles can be overcome using known techniques, solutions, and standard industry practices and knowledge. At the end of the technical problem solving process, although they may have resolved the obstacles and challenges, they haven’t added to the body of knowledge and capabilities related to the technology in question – they haven’t “advanced” technology. When the availability of knowledge and capabilities, both within the company and within the readily available external technology and industry environment, isn’t sufficient to overcome technical challenges and obstacles, we have what is called a technological knowledge gap. When a systematic process is undertaken to address the knowledge gap, you’re doing SR&ED. Whether you succeed or fail, the knowledge you gain about what works, what doesn’t work, or might work in the future on your next attempt, represents a technological advancement.

“I heard that we have to have hypotheses and follow the scientific method. We don’t do that” For the purposes of conducting eligible experimental development, the hypothesis requirement is simply referring to your “first idea” on how you will attempt to resolve the technological uncertainty you have identified. Once you’ve established that there is a technological knowledge gap related to the project you’re undertaking, the hypotheses requirement relates to your initial ideas on how you might address those uncertainties. The scientific method requirement is met by the simple planning process of your systematic investigation: plan, execute and react accordingly to the results and conclusions along the way as your development work unfolds.

“We get paid for all the work we do” – Think about it this way: Car makers get paid for the cars they sell. They make enough money doing it, (in theory) to cover all their development expenditures. But here’s the key: they get paid for the car, not the SR&ED they had to do to design and make it. Simply put, if you are getting paid to deliver something, but not directly for the SR&ED you’re doing, then you likely have a SR&ED claim to make. The rules can be a little tricky, but that’s what we’re here to help. Who is paying you, and for what, is just one of the considerations that impacts your SR&ED claim, but getting paid by your customers or clients does not necessarily, and usually doesn’t, preclude you from making a SR&ED claim!

“You make it sound like everything we do is SR&ED!” – Well, we know that isn’t going to be the case. But recognizing what is and isn’t SR&ED is the first step in maximizing your access to the cash refunds or tax credits you deserve. Get started today by contacting a BeneFACT SR&ED expert toll free at 1-855-TAX-BACK (829-2225) to answer any questions you may have and to see if you qualify for this lucrative tax program.  

Find out more about BeneFACT’s SR&ED Program click here!

Shredding Common Misconceptions About SR&ED

SR&ED Are You Sure You’re Getting the Money You Deserve? Yes, we know, it’s an old story now – the Scientific Research and Experimental Development (SR&ED) tax credit program has been providing Canadian firms with some of the richest R&D incentives in the world for decades. That being said, due to some very common misconceptions, there are still a large number of firms that do not access the program at all, or do not access the full value of the cash and credits they rightly deserve.

“We don’t do R&D” – This sounds a bit tricky at first, but the large majority of the firms that make successful SR&ED claims don’t do traditional R&D – they do Experimental Development. What this simply means is they are working with their products and manufacturing processes to achieve incremental technology advances. If you are developing products, including software, or undertaking manufacturing operations in Canada, then it is very likely that some of your work will meet the definition of experimental development.

“Didn’t the government just change all the rules” – Over the past few years, the government has changed some of the rules about what spending can be included in the claim, but overall, the program remains one of the most lucrative in the world. In addition, there haven’t been any changes to the type of development work that is eligible. In fact, recent court cases and policy refinements have made things more clear in terms of what should and shouldn’t be considered SR&ED.

“We don’t have any scientists or engineers” – You don’t need any to be doing SR&ED. A great number of firms make successful claims without any scientists or engineers on staff – they have technically competent and qualified people doing work. Successful SR&ED claims are full of programmers, technicians, skilled tradespeople, and equipment and process operators – these are people both leading and supporting the problem-solving process.

“We missed our chance. Our big projects started last year” – The SR&ED claim becomes part of your annual tax return, so, each year, you prepare a SR&ED submission for the work you performed and the money you spent, in that year. It doesn’t matter when the project started or whether you filed a SR&ED project for that initial year of the project – you just pick up the project where it’s at as the tax year you’re evaluating begins. It also doesn’t matter when the project ends – you claim the project in successive tax years for the work done and money spent in each year.

“I didn’t know all of that. It really seems like we should reconsider what this program means for us” – Exactly – we couldn’t agree more. Give us a call Toll Free at 1-855-TAX-BACK (829-2225) to learn how the BeneFACT Consulting Group Team can help maximize your claim!

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