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SR&ED Canada Tax – Scientific Research & Experimental Development (and why it can be worth A LOT)

What the heck is SR&ED? So, if you’re a small business owner and you’re reading this and you have no idea what this is, you actually should pay attention because it could be worth up to $1 000 000 for your business If it applies and if you’re eligible. But if you don’t know the basic parameters of what SR&ED is and what it’s all about, you won’t know what could potentially trigger making a claim and whether or not you may be eligible for this type of funding.

So SR&ED stands for, “Scientific Research & Experimental Development”. And it is a very unique tax credit that the Government of Canada has put in place to be able to encourage some research and development within our country. It is one of the more generous R&D programs and the way that it works is if you are a Canadian Controlled Private Corporation (CCPC), meaning you are a small company controlled in Canada, you can be eligible to get back 35% of your eligible spend on R&D activities. That could mean up to just about $1 000 000. So there is typically a cap meaning you can really only spend about $3 000 000 of what they actually reimburse you for and you would get back 35% of it as a cash refund.  Again like anything, when it comes to taxes, there’s a million caveats and a million disclaimers. Read all of the fine print but it is enough money on the table that it’s worthwhile digging into in order to figure out whether or not it’s an opportunity that is available to your specific company.

So the way that you’re going to go about determining your business’s eligibility is actually just doing a simple Google search for SR&ED and find a way to get yourself to the CRA website. They happen to have quite a few different online resources to be able to take you through a process to figure out, “Am I even in the ballpark of pursuing one of these claims?”. There are all kinds of firms out there that will do this for you and they tend to work on a contingency basis. So, they’ll tend to reach out and they’ll say, “Hey, looks like you might be eligible for something like this”. You may or may not want to work with one of those companies but you should be aware that if you work with them, you’re probably going to be forfeiting about 30% of whatever tax credit you’re able to get.

So, if you were one of those lucky companies that does have eligible R&D that you’re incurring and you choose to work with the company on a contingency basis., you’re basically going to be shelling over about potentially 300K for them to do this work for you. Or you could just spend 5 to 10 minutes now to find out whether you’re eligible. And also to reach out directly to the CRA Representatives that look after this program because there’s a ton of support and resources out there if you tend to meet the eligibility requirements.

So, what we’re going to do is walk through a 5-Part test that the CRA has shared under their Self-Assessment Learning tool, for SR&ED claims and walk you through it at a very cursory level. What are the things you should be thinking about? So, this is not whenever you’re kind of like, ready to file. When you’re ready to file, you’re going to want to do a ton more detail and digging. This is really intended to plant an anchor in your mind, to kind of trigger. whenever you’re doing activity, maybe you’re building a really unique app or you’re working on coding or programming or something. And you’re saying, “Wow, we’re really doing something that’s cutting edge, or something we’ve never done before!”. It’s to trigger you, even those situations, to say “Might there be a SR&ED here?”. And knowing how big the dollars are at stake, it’s worthwhile to then come along and do a little bit more digging in a little bit more detail.

So what we’re going to do is actually open the CRA Self-Assessment learning tool. We’re going to walk through. a 2-step process and Step one is actually a 5 step process. So step 1 overall is figuring out, “Do you have some kind of R&D at play here?”. It’s where you start to go through and you figure out, “Okay, I determined that my project really does have true R&D that’s eligible”. Step 2 is when you’re actually going to go through and you’re going to figure out what expenses are/aren’t eligible. Before you get to that path, you need to actually establish that there truly was some R&D at play in whatever you’re working on. And this is the more important part for you to kind of anchor in your mind to remember because this is what’s going to trigger you down the road when you’re working on something to say, “Could this possibly be SR&ED, and if so, is there an opportunity involved here?”.

Basically in Step One, you’re figuring out, “Am I SR&ED eligible?”, essentially “Is this spend SR&ED eligible?”. And the first part is going to be determining scientific or technological uncertainty. So you might be working with technology, building an app, or putting together a site. In these cases, there’s not really any uncertainty. The coding exists and what you’re building exists. So there’s really not anything out there under the sun that’s really brand new. You’re using technology, but there’s not a significant aspect of uncertainty associated in what you’re doing. The way to know that there’s some element of certainty or some not element of certainty is these 4 criterions that tend to tell you that there’s not really significant uncertainty involved. So, the four criteria that you can see here is:

There’s a straightforward application of a solution that’s publicly available in the internet

  1. You’re applying procedures or techniques known to you or that you are fairly certain would succeed
  2. You hired a consultant who knew how to solve the problem
  3. You asked for a solution from your supplier, vendors, or partners.
    • So, you could have gone to your vendors and partners and said, “Hey, how do I do this?”. So what this means is, if you are new in business and you’re creating your website for the first time and you say, “Oh, there’s technological uncertainty because I don’t know how to register, a domain name”. In this case, you are not going to qualify. Because those are the type of things that you can find out from others. There’s not technological uncertainty. Just the fact that you don’t know how to do it doesn’t establish technological uncertainty.

The next part is assessing if what you were doing involved creating different hypotheses to reduce or eliminate that uncertainty. So, if there was some element of technological uncertainty, but you just basically abandoned the problem. So there was something there, you don’t know the technology and you forget about it or you said, “You know what, we’re going to completely work around it”. This may involve actions such as lowering your quality criteria or changing the specifications. And then step number 3 is, “Was the overall approach consistent with the systematic investigation?”. So really, what you’re thinking here is, “Did you follow some semblance of a scientific method?”. So, essentially, did you randomly throw darts at a wall or did you go very systematically through a particular process?

Alright, so now you’ve crossed the first three hurdles. The next step is, “Was it undertaken to get some kind of an advancement in science or technology?”. Advancement is very going to be very, very closely related to uncertainty. What is important to know with advancement is that your project actually doesn’t have to use succeed. So if you run a test, you had your hypothesis, you determine your variables, you ran your test and you didn’t achieve what you had set out to achieve. Essentially, your test “failed” but that does not rule you out and that does not mean that your project was unsuccessful. What it really means is that you went through it in a fairly systematic approach.

Step 5 asks us, “Did you record any evidence of it?”. So, with anything that you’re dealing with in the taxation, accounting or finance space, you’re going to want to always be keeping very detailed records of the way that you’re working. You want to make sure that you can demonstrate that you actually had certain hypotheses that were being tested and that you kept the results. So it’s not enough if you did all four of the steps and passed all of those hurdles, put it all in a white board and just whiteboard it all away. No! Make sure you’re actually keeping a record of what you’re doing, and of course, the more documentation the better. So that really is a critical aspect of making sure that your business documentation is in place.

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