Plan Ahead for Your SR&ED

Plan Ahead for Your SR&ED – Shareholders’ bonuses can’t be claimed for SR&ED credits.  Or can they?

In our last post, we discussed the impact of the SR&ED expenditure limit on the SR&ED credits that can be earned by small and mid-sized Canadian Controlled Private Corporations (“CCPC”). The credits can more than double! We also discussed planning ahead to ensure you have expenditure limit available by paying bonuses to employee shareholders to reduce taxable income and create expenditure limit in order to access enhanced SR&ED credit rates. This post goes into more detail on the SR&ED treatment of shareholders’ bonuses and how to maximize your SR&ED claim by including bonuses in your qualified expenditures.

How are bonuses treated for SR&ED?
For most claimants, there are two expenditure categories that are driven by salary or wages – the SR&ED salary or wages themselves, and the Prescribed Proxy Amount (“PPA” or “proxy”). The proxy is a notional amount calculated based on salary or wages as a replacement for itemized overhead expenses. For 2014 and later years, the proxy rate is 55%, so potentially up to 155% of eligible salary or wages can be claimed for SR&ED purposes. For non-specified employees (not shareholders), the salary or wages amount used to calculate the proxy is reduced by bonuses and taxable benefits. This is usually a small adjustment and only affects the proxy calculation.

For shareholders, the treatment can be radically different. If a shareholder employee owns 10% or more of any class of the corporation’s shares, they are a specified employee. The scope of the specified employee definition also extends to family members of the shareholder and other non-arm’s length persons. For specified employees, bonuses are excluded from both the salary and wages amount and the proxy calculation. When a specified employee – i.e. an owner manager – receives a large bonus payment, this can have a huge impact on the SR&ED expenditures and tax credits. This could be the case when a company “bonuses down” to reduce taxable income and access the enhanced SR&ED tax credits.

How can shareholders’ bonuses be claimed for SR&ED?
CRA’s policy is to treat a single lump sum received by a specified employee as the employee’s salary or wages for the year as long as it is the only payroll payment received in the year. Under this policy, as long as all the proper payroll procedures are followed, the total amount paid to a specified employee would be considered salary or wages for the year.

There are certain limits on the amounts eligible for SR&ED in respect to specified employees based on the Yearly Maximum Pensionable Earnings (also used for CPP), so be sure to involve your SR&ED consultant in the planning process prior to declaring and paying your bonuses to ensure that you’re making an informed decision.

But I need monthly income to live on                                                                       One strategy that can provide monthly cash flow while also getting your annual bonus included for SR&ED is taking a shareholder draw which could be repaid from the bonus. This may work for you depending on a variety of factors such as your corporate structure, other shareholders, etc.  Talk to your tax advisors about this or other cash flow strategies based on your specific circumstances.

Is it really worth it to go through all this?
Let’s look at a numerical example of SR&ED expenditures and tax credits in different scenarios:

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

SR&ED Example

 

 

 

 

Depending on the ratio of periodic salary to bonus amounts, combined with the portion being claimed for SR&ED, the impact of the different compensation approaches can be quite dramatic.

Speak with a BeneFACT SR&ED expert today to learn more about the SR&ED program to see if your company’s activities qualify for this lucrative tax credit.  Get the information you need to start maximizing your claim today! Toll Free: 1-855-TAX-BACK (829-2225)

Please click here to learn more about our SR&ED services.

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!