If your business is involved in research and development, you may be eligible for tax credits from Canada’s Scientific Research and Experimental Development (SR&ED) program. The Canadian Revenue Agency administers this program, and it is one of Canada’s most significant sources of government-backed funding for research and development. Several factors can influence the amount of SR&ED tax credits your business may receive in a fiscal year. For companies needing help calculating their SR&ED refund, below is a quick overview of how to determine your SR&ED tax credits. Continue reading to find out more!
How to Determine Your Estimated SR&ED Tax Credit Refund
SR&ED tax credit refunds are paid in arrears after businesses submit a claim for them during their annual tax submissions.
To obtain an SR&ED tax credit refund, your company must submit a claim after accruing tax credits for eligible research and development-related work expenses. This submission for SR&ED tax credits requires a completed T661 form to be provided to the Canadian Revenue Agency (CRA). Once the fiscal year ends, your company will have 12 months after the income tax reporting deadline to submit your SR&ED claim.
However, if your R&D project will take several years to complete, do not wait! You only have 18 months after your fiscal year-end to submit your SR&ED claim for that fiscal year; even if your project takes a few years to finish, you can still submit for the SR&ED tax credits you accrued during that year. If your company plans to claim SR&ED tax credits, below are five factors you should consider as they will impact the value of your received credits.
Salaries & Payroll Expenses
Four main categories of work are eligible for SR&ED tax credits— basic research, applied research, experimental development, and general activities that support the three aforementioned categories. Furthermore, three primary costs will earn SR&ED tax credits: payroll, materials, and sub-contracts. Unfortunately, capital expenditures, like specialized equipment and facilities, are not eligible; however, overhead costs can be claimed in part with payroll.
To determine payroll expenses eligible for your SR&ED claim, it’s best to document the number of hours worked daily by your staff on qualifying activities. Once you’ve calculated the number of hours, multiply the total hours by your staff’s hourly pay rate. If your employees are salaried workers, you can divide their annual wages by their total hours worked that year.
Many companies involved in R&D work utilize individual and firm-based subcontractors for their projects. However, if your company is considering claiming these expenses under your SR&ED tax credits, your subcontractors must be Canadian. That means they must have a SIN or HST/BN number. Once you have compiled your contractor expenses, calculate 80% of that total amount. The final number will be the total you may claim for the SR&ED tax credit.
Regarding material expenses qualifying for SR&ED, there are only two types— materials used to create prototypes and those consumed during experimentation and rendered useless. Fortunately, you may include the cost of acquiring these materials, like shipping costs, which include customs and duties fees. Once you’ve compiled the costs for these expenses, add them together to calculate your total SR&ED expenditures for the year.
Location, Location, Location
In addition to the federal SR&ED program, several other provinces and territories offer research and development tax credits. That being said, each region will have specific guidelines concerning eligible expenses and qualifying organizations. To ensure you’re maximizing your SR&ED tax credits, investigate the provincial R&D credits available in your province or territory.
Other Government Programs and SR&ED
When it comes to government programs for innovative companies, SR&ED is not the only initiative your business may be eligible for. Some other initiatives include the Industrial Research Assistance Program (IRAP), Interactive Digital Media Tax Credit, and more! Depending on the other programs and initiatives your company claims, your overall SR&ED claim may be impacted. That means your company needs to factor in the total applicable amount of other government financial support when calculating your SR&ED tax credit refund. Companies that qualify for these tax credits should also be aware of their SR&ED expenditure limit.
Easly’s SR&ED Calculator Makes Estimating Your Tax Credits Easy!
SR&ED tax credits can be a challenge to calculate on your own. Fortunately, Easly has a helpful SR&ED tax credit calculator tool that can quickly estimate your SR&ED refund amount. To use this tool, fill in all the few variables listed and get an estimate of your refund!
Learn More About Financing Your SR&ED Tax Credits with Easly
Obtaining the financial support you need to continue your R&D work can be challenging since R&D tax credits are paid in arrears. However, by partnering with Easly, your company can utilize that tax credit refund much sooner! Contact Easly today to learn more about calculating your SR&ED tax credits or to get started with Easly Advances to turn tomorrow’s tax credit refund into cash in your bank account today!