The Scientific Research and Experimental Development (SR&ED) program helps countless Canadian companies make research and development (R&D) activities more affordable through SR&ED investment tax credits (ITCs). With more than $3 billion in tax incentives provided to more than 20,000 applicants, the program’s economic and innovative impacts are evident. However, errors, oversights, and inaccuracies in your SR&ED claim quickly lead to penalties that reduce available ITCs. Could your company be at risk? Learn more about avoiding SR&ED claim penalties with insights from Easly.
Avoid Overstated and False Claims
It should go without saying, but any attempt to falsify or inflate your SR&ED claim will likely result in significant penalties from the Canada Revenue Agency (CRA). Fines are not issued for genuine errors, which will sometimes occur due to the SR&ED reporting complexities. Instead, knowing violation of the standards set forth by the CRA, along with gross negligence in confirming the accuracy of a company’s claim, may result in a penalty due to the following:
- Overstatement of the claim
- Inclusion of expenditure for ineligible activities
- Report of normal business activities and expenditure as SR&ED-eligible
Claimants are entitled to object to and appeal any penalties assessed by the CRA in these matters, but doing so is likely to delay receipt of much-needed funding and slow future SR&ED work.
Never Ignore Written CRA Notices
When the CRA determines that a company has submitted incorrect or insufficient claim information, it will provide written guidance to help the organization correct the issue. These notices should never be ignored, as failure to acknowledge claim problems and correct them will result in penalties. If the CRA notifies you of a miscalculation or claims of unqualified expenditure, contact the agency immediately and work with your accountant or another claim preparer to remedy the situation.
Similarly, continued attempts to claim unsubstantiated amounts for SR&ED incentives may also result in a penalty. Vigilance in record-keeping can help verify all valid expenses and avoid costly penalties. If your company lacks a formal documentation method, maintaining detailed notes, relevant emails, meeting minutes, and other sources that substantiate your claim will typically suffice.
Properly Document Additional Sources of Funding
The amount of your SR&ED tax investment credit is determined by your qualified expenditure pool or all of your company’s eligible expenses accrued on SR&ED work. At the same time, many companies receive R&D grants from numerous sources, including governmental agencies and private entities. While not all R&D work is eligible for SR&ED, grants received from any of these sources can affect your qualifying expenditure on a project-by-project basis.
This is because the CRA deducts the value of any grant that can reasonably be considered as used for R&D from the total deductible SR&ED expenditure for each relevant project. Accordingly, grant funding received for ineligible activities may still reduce your overall claim.
Meticulous documentation of grants and other funding is the best way to maximize your SR&ED investment tax credit. The wording used in your SR&ED claim is crucial and must be as precise as possible when detailing funds received and their allocation. Likewise, your company may receive grants that provide partial funding for eligible expenditure. In these cases, equal care is needed to document the exact portion of expenditures paid for with other financing sources, which may be included in your claim.
Do Not Improperly Classify Grants as Loans
The difference between grants and loans can be confusing. In some cases, grants are described as forgivable loans that eliminate the need for repayment when specific stipulations are met. Other grants require some form of repayment through a percentage of royalties or profits. In light of this, it may be tempting to use the terms loosely as a method to reduce the funding’s impact on your qualified expenditure pool.
Keep in mind that even if your grant is based on a forgivable loan or similar structure, it still cannot be treated as a loan in calculating your SR&ED claim. Failure to accurately describe these grants may result in CRA penalties and a reduction in your eligible SR&ED investment tax credit.
Provide Accurate Claim Preparer Information
The form used to report an SR&ED claim, Form T661, is complex. Like many businesses, your company may engage a third-party claim preparer to ensure it is correctly completed. If you do, be aware that Part 9 of the form must include complete and accurate information about the claim preparer to avoid penalties. Those who fail to provide this information – claimant and claim preparer alike – could face a $1,000 penalty. For the purposes of Form T661 Part 9, a claim preparer is anyone who assists in completing the form and who is not doing so as part of their job duties for your company.
To ensure Form T661 Part 9 is completed to meet CRA expectations, you will need the following information:
- The preparer’s full and accurate name or business name
- Their Business Number (BN) or HST/GST Number
- Relevant billing codes for their services (billing codes can be found within Form T661)
- The amount paid to each preparer
- The total paid to all preparers if you worked with multiple parties
- The name of an authorized individual to sign and verify the information
- A signature or, if filing electronically, the signer’s BN, tax year-end, and web access code
In some cases, penalties for faulty information may be avoided. You will need to prove extraordinary circumstances or that an acceptable level of care was taken in preparation of the form.
Claim Your Full SR&ED Investment Tax Credit
Avoiding penalties is a smart way to receive the maximum SR&ED credit for your R&D activities. Are you looking for additional strategies to optimize receipt of your credit? Turn to Easly SR&ED financing, which helps you receive funds more quickly so you can continue your important work. To learn more, contact us today.