It's February and the allure of fresh powder, and the
promise of a cold pint have brought you "up the hill" for
a great day on the slopes. Excitedly sitting on the chair lift you
can't imagine what could be better than shredding the mountain
right now. To be honest, I can think of a multitude of things
– mainly because I dislike the cold and barely tolerate
winter. One of those things is writing on the Scientific Research
and Experimental Development or "SR&ED" (pronounced
"SHRED" – the potential winter wordplay is
What is the SR&ED program?
The SR&ED program is a federal tax incentive program that is
designed to encourage Canadian businesses to conduct research and
development (R&D) in Canada. The program can give claimants
cash refunds and/or tax credits for their expenditures on eligible
research and development costs incurred. The Canada Revenue Agency
(CRA) administers the program (and most of the associated
provincial or territorial programs), so applications are reviewed
from a technological perspective but also entail specific reporting
requirements for income tax purposes.
Cash back and/or reduced taxes for incurring costs I was going
to anyway!!?? Go on...
The return on investment can be quite lucrative, whether
it's reducing your tax bill or increasing cash flow for those
who are not yet writing with black ink. As an example, let's
say I run a technology company (a stretch for a tax accountant to
be sure). It is a Canadian Controlled Private Corporation
(different types of corporations or individuals are subject to
varying levels of credit and/or refund.), and I currently pay
myself a $40,000 salary. When I look at my timesheets, I can
attribute just over 70% of my time to eligible research and
development efforts. Under a common method of claiming a SR&ED
credit, a successful application can yield a cash refund of about
$18,000 assuming no corporate taxes are payable for the year of the
claim. Ignoring tax-effecting these numbers, that's about a 45%
cash return on investment on salary costs that I was spending
REGARDLESS of the SR&ED program. The return is 64% if I just
consider the salary costs for SR&ED efforts only.
What's the catch?
The biggest catch is ensuring that the research and development
costs you base your claim on are "eligible" as defined by
the Income Tax Act. In a nut shell, this means that the costs
incurred must be for:
1. Basic research,
2. Applied research,
3. Experimental development, and/or
4. Support work for the above three.
How you fit into one of those four categories is a matter of
fact. And the fact is, you're likely in the best position to
determine this. There are however, a number of tools that exist to
The second biggest catch is ensuring that the required tax
disclosures (which can span over multiple years for certain claims)
are made so that the refund or tax break you enjoy stays yours in
full, and that you file a claim on time. You must file a SR&ED
claim within 18 months of your tax year. This is where the tax
group at Crowe MacKay can help ensure full compliance.
So when you're sitting on the chair lift anxiously waiting
to get to the top, consider using some of that time thinking about
how much of your work day consists of research and development for
your business. Your efforts may be more valuable than you
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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