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.
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)