The Scientific Research and Experimental Development (SR&ED) program provides tax incentives to encourage Canadian companies to conduct research and development. Each year, the program offers more than $3 billion in tax incentives to over 20,000 Canadian businesses. Not all companies understand the benefits of participating in the program and fail to identify their SR&ED eligibility opportunities. With a variety of myths surrounding the program, it’s often hard to understand if applying is worth the effort.
A closer look at these myths can help you get a better idea about SR&ED eligibility.
Myth #1: Claiming SR&ED expenses is only possible if the project is successful.
Debunked: You can still claim expenses for unsuccessful projects. The goal of the SR&ED tax incentive program is to inspire Canadian companies to try and solve technical challenges.
If the project is unsuccessful, it only confirms that challenges exist. Failure simply means that more effort is required to overcome them.
Myth #2: If I file an SR&ED claim, I should expect a full audit of my company’s finances.
Debunked: When you apply for the SR&ED program, the Canada Revenue Agency (CRA) is only interested in your SR&ED-related expenses and technical content. They don’t need to audit your entire finances to figure out if you are eligible.
This particular myth is very common among companies of all sizes, holding them back from seizing this cost-cutting opportunity.
Myth #3: I don’t qualify because the project won’t be completed this calendar year.
Debunked: Even though SR&ED claims have to be filed on a corporation’s tax year-end, if your project isn’t completed, you can still claim many costs associated with it. You don’t need to wait until the end of the project to start claiming your tax credits with the (CRA).
Myth #4: I’m not eligible for the SR&ED program because I already received government funding.
Debunked: It’s important to understand that SR&ED isn’t a grant or a voucher. The program is a generous tax incentive awarded to businesses or individuals who are conducting research and development activities.
You can receive both government funding and SR&ED tax credits – for more information see our blog post on the subject.
This incentive covers: salaries, materials consumed or transformed, sub-contractors and some 3rd party payments. One of the most generous elements is the 55% overhead multiplier that accompanies salaries. For example, a company with $1M in SR&ED eligible salary expense would have an additional $550,000 allowance for overhead making the salary ITC $1.55M.
Myth #5: I’m not eligible because my competitor is already working on a similar R&D project.
Debunked: Even if another company is already working on similar research and development, you still may be eligible for the tax incentive. However, your competitor’s work shouldn’t be publicly accessible at the time you are undertaking your project.
Myth #6: The fiscal year is long over. It’s too late for a SR&ED claim.
Debunked: You have to file the SR&ED claim to the CRA 18 months after the end of your fiscal year. If your fiscal year ended December 31st, 2019, your claim is due before June 30th, 2021.
Even if you haven’t been keeping top-notch formal records, you can still go back and recover emails, meeting minutes, and research notes. All of them are eligible SR&ED documentation. Your standard records may be enough to qualify for the incentive.
Myth #7: Small companies can’t apply for SR&ED.
Debunked: When it comes to research and development tax incentives, the CRA doesn’t differentiate between small businesses, large companies, partnerships, corporations, trusts, or sole proprietorships.
As long as you are spending money on eligible R&D, keeping track of your research, and filing the right documentation, the company’s size is irrelevant.
Even if you are pre-revenue or far from profitability, claiming SR&ED expenses is still possible. SR&ED is an excellent opportunity for your company to grow and thrive without substantial expenses.
Myth #8: I don’t do R&D so I don’t qualify.
Debunked: The Scientific Research and Experimental Development program has a broad definition of work that makes your company eligible for an incentive. The key to qualifying is undertaking the project with technological uncertainty involved. It could mean that you are prototyping, testing, or developing new products.
The work you are doing may not feel like R&D per se, but it could make you eligible for the program. That’s why it’s imperative to do proper research to understand SR&ED eligibility.
Myth #9: The maximum investment tax credit I can get is 35%.
Debunked: While the federal government offers a 35% investment tax credit to Canadian-controlled private corporations (CCPCs) for the first $3M of eligible expenses, your company will likely also qualify for provincial investment tax credits. These vary in terms of rates and whether they are refundable but can be substantial. In some jurisdictions, this can result in a combined refund rate of up to 65.5% on salaries. To see how much you qualify for use our SR&ED Calculator.
Myth #10: If I don’t pay taxes, I can’t get the credit.
Debunked: Even if you don’t pay taxes yet, your company is still eligible for the SR&ED program. You can successfully apply for the SR&ED tax credit even if you are a start-up. CCPCs can receive a cash refund on R&D expenses even if they don’t pay taxes or receive a tax refund.
The most common SR&ED myths have to do with eligibility. Many companies simply don’t realize that they are missing excellent cost-saving opportunities. By digging deeper into the program’s requirements, you could be surprised to learn how many industries and activities it covers.
It can take several months for the CRA to award you tax credits after you file the SR&ED claim. Many companies need money much faster to support their projects. At Easly, we provide eligible companies funds to proceed with their R&D work within two weeks of application.
For more information about SR&ED eligibility and fast financing options, please contact us.