Guest post by Mark Maclean
Do I qualify?
The best place to start is with the basic question “Do I qualify?”. For most companies I meet, in any industry, the short answer is “Yes!” Don’t be scared by the name of the program. The title can actually be broken down into two separate parts, Scientific Research and Experimental Development. Most companies will qualify for the experimental development aspect. Experimental development is essentially attempting to better your business or product(s) through a technical means. Bottom line is that if you are trying to develop or improve a part of your business process or one of your products then you should be taking a closer look at the SR&ED program.
What’s the value to me?
Once you’ve determined that you have projects in your business that might be eligible, the next question is, inevitably, what can be claimed for a credit? You can claim a tax credit on salaries, subcontractors and materials related to the SR&ED performed by your business. An amount for overhead cost is also included, but that is calculated through the use of the salaries. For the purpose of these numbers, I’ll use an example of a small private company that is eligible for the maximum credit rates in Quebec. These percentages vary across Canada, but if you are operating in Quebec you can get a tax credit of up to 80% of eligible salaries, 40% of eligible subcontractors and 35% of eligible materials. The bottom line on what qualifies is that you can get a refund of up to 80% of the costs associated to an eligible project. You should be aware that as your company grows the tax credit rates can be reduced, however if you are operating in Quebec you will always be entitled to at least a 17.5% cash credit.
How long does it take to get the cash?
When I get asked this question I tell people not to expect their money before 6 months of submitting the claim. For example, if you have December year end, your accountant has up to 6 months to submit your taxes. Let’s say he submits them at the deadline at the end of June. In my experience, the federal government will give you an answer in 3 to 4 months whether it’s accepted or under audit. If accepted, you should receive a check from the federal government within the next month and a check for the provincial amount in the following month. These timeframes can vary significantly but as a first time claimant I wouldn’t count on getting your money any sooner than this. We have seen claims accepted within two weeks, but this is more the exception than the rule.
You mentioned the possibility of an audit. I’m scared!
Don’t be! An audit is not a bad thing. As long as you make sure your projects are documented and are eligible under the criteria of the program, you should not be worried. Normally the same auditor is assigned to your file for every year it is submitted, so if they think you don’t know what you are doing or trying to claim projects that are not eligible, they may have to come back year after year to verify your claim. On the other hand, if you are able to defend your claim to the government and justify your SR&ED costs you will be in good standing for future claims.
SR&ED sounds great, where else can I get money?
It’s true; the SR&ED program is a great program. There are also a number of other programs for which you could be eligible depending on your industry. For example, another program that many IT companies apply for is the E-Business program administered by Investissement Quebec. The goal when combining different tax credits is to claim them in the most efficient manner so that you are maximizing the total amounts you could possibly get.
Overall, the SR&ED program is a great program to help support your development activity. There is no limit on how small or how big of a company you need to be. The only restriction to getting any money back is that you have to spend money on eligible work. If you are not claiming yet I would suggest you at take a close look to ensure you are not missing cash refunds. Any good business should be attempting to get better every day, and many times these activities can be eligible for some money from the government. Imagine what you could do with an extra 80% of your development costs each year.
About Mark Maclean
Mark works in the Business Tax Incentive and SR&ED department for EY in the Montreal office. As a Manager at Ernst & Young, Mark is responsible for working with companies of all sizes to identify and prepare any business tax incentives that they would be eligible for.