The COVID-19 pandemic took a considerable toll on economies around the world, including here in Canada. Many businesses have experienced financial losses and anticipate an uncertain future for employers and workers alike. The Canada Emergency Wage Subsidy (CEWS) helps address this uncertainty with funds to help keep employees on the job. While this is a positive for your company, the subsidy may also impact other government grants and tax incentives you receive. Among the programs affected is the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program. If your business received CEWS program funds, discover what this could mean for your SR&ED claim below.
What Is the Canada Emergency Wage Subsidy?
On April 4, 2020, the Canadian government enacted the Canada Emergency Wage Subsidy legislation, allocating $73 billion for subsidies to help employers retain current staff and rehire individuals dismissed due to pandemic-related revenue losses. Companies with demonstrated losses may submit CEWS claims every four weeks to help pay wages. It was announced in the 2021 Federal Budget that the program would be extended from its original expiration date in June to September 25th, 2021.
Beyond keeping a greater portion of the workforce employed during this difficult time, the CEWS program is also designed for commercial readiness. These subsidies help ensure that Canadian companies are well-prepared to return to normal operations when the COVID-19 pandemic ends.
Why Will the CEWS Program Affect My SR&ED Claim?
Many eligible businesses have been concerned about how the CEWS program will impact SR&ED government grants. In June 2020, the Canada Revenue Agency (CRA) clarified its position on this issue by stating that CEWS is considered government assistance. This government assistance directly affects your SR&ED expenditure by providing funds for eligible wages. Accordingly, it also reduces the number of eligible expenses for your SR&ED claim.
Entities that take advantage of the CEWS program must report the subsidies they receive on Form T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim when submitting income taxes for the 2020 and 2021 tax years. Like any other government assistance, the amount received through the program must be included in Lines 431 and 515 when submitting a claim.
Calculating Your Deductible and Qualified SR&ED Expenditures
CEWS program funding affects two key areas of your SR&ED claim – the pool of deductible expenditures and the qualified SR&ED expenditure total. Companies must deduct CEWS subsidies from both values if they:
- Have already received assistance
- Are entitled to CEWS program support
- May reasonably expect to receive this support in the future
If the total deducted from your pool of deductible expenses is greater than the total value of your claim, the balance will be included in the following year’s net income claim.
The takeaway: Companies that benefited from the CEWS program will likely see a reduction in their SR&ED claims for 2020 and 2021. For some, the subsidies received will exceed and thus cancel out their claim.
Understanding Eligible SR&ED Wages
When completing Form T661, employee wages are broken into directly engaged and directly attributable categories. These can be understood as follows:
Directly engaged employees
These workers are involved in hands-on SR&ED work, such as engineers or product designers. Wages paid to directly engaged employees may be claimed using the traditional or proxy method for claim calculation.
Directly attributable employees
While these workers do not directly engage in SR&ED activities, their labor is necessary to complete them. They include managers, project administrators, clerical support staff, and others. These wages are reported as overhead expenses and may only be included via the traditional method.
When calculating deductible and qualified expenditures, employers must use the same method for all employees. The CEWS program may cover both types of wages. This means that subsidies for either will ultimately reduce your pool of deductible expenditures.
However, your employees’ amount of time on SR&ED work determines how much of the CEWS program funding must be reported on Form T661. The total value of the subsidies received for directly engaged and directly attributable employees conducting eligible SR&ED work at least 90% of the time must be reported. If your employee spends 30% of her time on SR&ED activities and 70% elsewhere, only 30% of the subsidy received must be reported.
If you will claim only a portion of the total subsidy received on Form T661, careful record-keeping is critical. Thoroughly documenting each employee’s work hours and allocation of efforts is the best way to ensure efficient claims processing and avoid penalties.
Learn More about the CEWS Program and Your SR&ED Claim
While CEWS funds may reduce your SR&ED claim for the 2020 and 2021 tax years, these subsidies also play a key role in preparing your company for a full return to standard operations in a post-pandemic world. Additionally, the challenges created by this public health crisis are sure to generate new opportunities for innovation and future SR&ED work.
Even with likely reductions in your investment tax credit, receiving your SR&ED refund as soon as possible is essential. If you have questions about the impact of the CEWS program on your refund, contact Easly today. Our Capital-as-a-Service (CAAS) approach to funding can finance your SR&ED refund and provide payment in as little as two weeks to ensure access to the operating capital required to navigate this challenging business landscape successfully.