Every year, the federal government gives out about $4-billion to help businesses develop new products and processes. About 25,000 companies make claims, but there are many more that probably could – and would – if they knew where to start.
And many claims could be bigger if companies really knew what the Canada Revenue Agency looks for in its evaluation, while others could avoid having their claim amounts reduced by the CRA if they did the paperwork properly and had better systems to track and document their work.
Here are some tips to help your business cash in on the incentives and savings that could, just possibly, be yours for the taking.
Most goes to the big four
With much of Canada's economy rooted in manufacturing, it's not surprising that half of the scientific research and experimental development (SR&ED) tax incentive program funds have traditionally gone to industries like auto parts and tool-and-die making.
The next-largest beneficiary is software and information technology, which accounts for roughly another 30 per cent. The remaining 20 per cent is split largely between "farms and pharma" – agriculture and pharmaceutical companies.
But things change. Many companies that are not in typical SR&ED claim-eligible businesses – like wholesalers and distributors – now sometimes create new products or improve processes in ways that could qualify.
Maximize your claim
The biggest "missed opportunities" for companies? Failing to get all of the refunds or credits they might be entitled to.
For instance, not identifying SR&ED projects at the right levels for funding, failing to include eligible activities and costs, and just plain not recognizing which projects qualify for the program – all are ripe areas that experienced, trained consultants familiar with the program can help to investigate.
The stakes can be high, but don't get greedy
Eighty per cent of the clients I help with their SR&ED claims each year receive more than $50,000 in benefits and savings, and many get more than $200,000. You shouldn't get greedy, however.
If you develop new products and processes each year, it makes sense to file a SR&ED claim each year. A CRA site review is inevitable, so create a good impression and demonstrate that you understand the rules.
Don't claim 80 per cent of the president's salary as eligible for SR&ED if you can't back it up, especially when it's clear that most of his or her time is spent on the commercial side of the business.
Make money even when you lose money
By way of illustration, a privately owned Canadian company in Ontario, with the right profit levels, doing the right things in the right industry, could potentially get back more than 40 per cent of it spends on research and development from the program. A large company could get as much as 20 per cent.
Even a privately owned Canadian company that reports a net loss in profitability won't necessarily find its benefits are impacted. Under the right circumstances, the SR&ED credits can offset taxes you owe or generate a refund in the amount of the credits, even if your business loses money.
Documentation is key
By far, the biggest challenge most companies face in making SR&ED claims to the CRA is keeping proper paperwork and sufficient documentation to substantiate them. Much of what is needed is reconstructed ad hoc with little contemporaneous documentation – omissions, the government hates.
Don't be a slave to the calendar
The SR&ED program is nothing if not flexible. Credits claimed in a single year can be carried back as much as three years to recover past taxes paid. They can also be carried forward to offset future taxes for as long as 20 years.
Pre-approval not required
There is no need to get approval to make an SR&ED claim before beginning that new initiative, although you can do so in certain cases. Your eligibility will be determined as your claim is filed and processed.
Don't forget to file the claim
There is an 18-month deadline for making an SR&ED claim. You can miss some tax deadlines and either there is no effect, or you can get the same tax result with a minor penalty. However, SR&ED claims are different – if you miss the deadline, you get nothing.
Expect a visit from the CRA
To keep this very expensive program honest, the CRA administers it carefully. A team of technical auditors, engineers, and other highly trained professionals visit claimants to assess progress and the validity of their claims.
About one-third of all claims are audited each year, and you can expect to be the subject of one of these in-depth evaluations at least every five or six years. So keep a tight rein on your records and data.
Special to The Globe and Mail