1. What exactly is the SR & ED Program?
2. How much can I or my Company get back?
3. How do I obtain the maximum 35% refundable SR & ED Federal Tax credit?
4. What expenditures qualify for SR & ED?
5. Will the work my Company is doing qualify for SR & ED?
6. What happens if my SR & ED projects are not completed at the end of my fiscal year?
7. How much time do I have to make a claim?
8. How long will it take to process my claim?
9. Are there Provincial or Territorial SR & ED incentives?
10. Will my competitors find out about my SR & ED?
11. Will my entire business be audited if I make a claim?
12. Our accountants prepare all our taxes. Can't they prepare these claims for us?
13. What happens after I send in my claim?
14. Tell me about your SR & ED Workshops.
15. I have heard that the Ontario Government also offers SR & ED Tax Credits. Tell me more!
16. What is the general process for my Company to apply for a SR & ED tax credit?
17. My Company is a large, US-based multinational corporation. Would such a large corporation be eligible for SR & ED Tax Credits?
18. How does the SR & ED fee structure work?
19. Should I Finance SR&ED Tax Credits?
20. What are your recommendations on filing a successful SR&ED claim to CRA?

Scientific Research & Experimental Development Tax Credits (SR & ED)

What exactly is the SR & ED Program?

The SR&ED program is a tax incentive program to encourage SR & ED in Canada. The Program is administered by the Canada Customs and Revenue Agency ("CCRA"), and is claimed through income tax returns. While the SR&ED Program is available to corporations, individuals, or partnerships, most of the claims are made by corporations through the corporate income tax return.

SR & ED stands for "Scientific Research and Experimental Development." Most claims are made on the basis of experimental development. In this regard, many businesses in manufacturing, information technology, software development, engineering, and food science make SR&ED claims in the area of experimental development.

In fact, any time a Company in the above industries, is creating or improving upon a new product or process, there is generally a high degree of probability that they will be eligible for SR & ED tax credits. In many cases, the tax credits result in a cash refund to the Company. Otherwise, at the very least, companies are eligible for a federal 20% investment tax credit as it relates to SR & ED expenditures. Many provinces have their own SR & ED tax incentives.

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How much can I or my Company get back?

At the Federal level, there are essentially two levels of investment tax credits. For Canadian controlled private corporations (CCPCs) that meet certain additional criteria, 35% of qualified SR & ED expenditures may either be applied against taxes owing or refunded in cash. Thus, if the Corporation does not owe any taxes, 35% of eligible expenditures would be refunded in cash to the Company. For all other companies, a 20% investment tax credit is available. To the extent a Company cannot apply an investment tax credit in the year, the investment tax credit may be carried back three years to apply against taxes which were paid or payable, and carried forward for ten years to apply against future taxes payable.

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How do I obtain the maximum 35% refundable SR & ED Federal Tax credit?

In order to qualify for the refundable ITC, you must meet the following criteria:

1. You must be a Canadian controlled private corporation.
2. The taxable income of the associated group must be less than $200,000 for the preceding taxation year. If the taxable income of the associated group is between $200,000 and $400,000 in the preceding year, you may be able to get all or a portion of your SR & ED expenditures at the 35% refundable rate. You should also note that due to changes in tax legislation, over time the requirement will be moved to taxable income being less than $300,000 with a sliding scale formula up to $500,000.
3. The large Corporation taxable capital for the preceding year for all associated corporations is less than $10 million. Again there is a sliding scale where the expenditure limit is reduced or the taxable capital is between $10 and $15 million.

If you are uncertain as to whether you meet the test to qualify for the refundable tax credit, please contact us at 416-368-7990.

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What expenditures qualify for SR & ED?

There are two methods in which you can claim SR&ED expenditures. One method is known as the traditional method and the other method is known as the proxy method.

Proxy Method:

Most companies claiming SR&ED tax credits claim under the proxy method. The proxy method is a simple approach to claiming SR&ED expenditures. Under the proxy method the following expenditures may be claimed:

1. Wages for staff doing SR&ED work for "hands on" SR & ED activities.
2. Materials effectively used up or consumed in performing SR & ED (note that materials which ultimately go into commercial production or are sold need special consideration and analysis to determine if they may be claimed).
3. Payments made to contractors to carry out SR&ED on behalf of the Company.
4. Leased equipment to the extent that 90% of the lease relates to SR & ED (a portion of SR & ED tax credits claimed to the extent that 50% of the lease relates to SR & ED).
5. Capital equipment to the extent that it is new and used 90% or more in SR & ED (partial tax credits are available if the capital equipment is used 50% or more in SR & ED).

In addition to the above, overhead may be claimed based on a factor of 65% of direct SR & ED salaries. The 65% factor only applies to salaries (i.e. amounts that are T4'd, whereby employees are on the Company's payroll: notes, contract payments, management fees or shareholder draws do not apply to this calculation). Generally, where SR & ED is labour-intensive, most companies select the proxy method, as 65% of directly engaged SR & ED salaries and wages, far exceed actual overhead.

Traditional Method:

The second method is known as the traditional method, which includes all of the above costs as well as:

1. Actual overhead to the extent that it relates to SR & ED activities.
2. Administrative salaries and wages to the extent that they relate to SR & ED.
3. Capital equipment or leased equipment to the extent that it relates to SR & ED.

Typically we find only companies that do not pay salaries or wages, or companies with a high degree of overhead will claim under the traditional method; however, our experience is that 90% of companies claim under the proxy method.

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Will the work my Company is doing qualify for SR & ED?

If you are a Canadian individual, partnership or small business that develops new or improved materials, products or processes in Canada, you may be eligible to receive SR & ED tax credits if:

1. Your work plan, if successfully completed, will result in a technological advance in your industry or field. Even if your attempts prove unsuccessful, you may still qualify.
2. You have to overcome one or more new or unexpected technological problems or uncertainties.
3. You have to carry out the development in a systematic manner, such as conducting trials, experiments, or analyses, to solve these problems.
4. You require experienced and trained specialists to complete the development of your SR & ED project.

You also must demonstrate that the work was done. You can use reports, models, prototypes, test results, logbooks, or photographs to help support your claim.

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What happens if my SR & ED projects are not completed at the end of my fiscal year?

You can claim for projects undertaken and costs incurred during your Company's taxation year. If the work continues to qualify as SR & ED in later years, you can claim costs in those later taxation years as well.

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How much time do I have to make a claim?

You should submit your SR & ED claim with your T2 Corporate Income Tax Return within six months of your fiscal year-end; however, if you are a corporation, you must file SR & ED claims within 18 months from the end of the taxation year in which you are making a claim. If you wait longer than 18 months, the SR & ED tax credits are lost forever. For partnerships, individuals etc., you should contact us to determine the correct filing dates.

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How long will it take to process my claim?

All claims are reviewed by CCRA to determine if a complete claim can be processed as filed or if further review is necessary.

For refundable claims, if your claim is filed within 6 months of your taxation year-end, CCRA has committed to reviewing and processing your claim within 120 days of receiving your complete claim. Alternatively, if your claim is filed within 18 months of your taxation year-end as an adjustment to your income tax return that has been previously filed, CCRA will complete the review process within 240 days of receiving your complete claim.

For non-refundable claims, if your claim is filed within 6 months of your taxation year-end, CCRA will advise you within 120 days as to whether your claim will be processed as filed, or if further review is required. If further review is required CCRA will complete the review process within one year of receiving a complete claim. Alternatively, if your claim is filed within 18 months of your taxation year-end as an adjustment to your income tax return that has been previously filed, CCRA will complete the review process within 180 days or 360 days of receiving your complete claim depending on the amount of review required.

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Are there Provincial or Territorial SR & ED incentives?

Yes. Most Provincial and Territorial governments provide SR & ED incentives, either separately or as part of the Federal Program. For more information, please contact us.

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Will my competitors find out about my SR & ED?

No. CCRA has to maintain confidentiality on all files and information they gather. At Cookson Walker LLP, we also maintain strict confidentiality of all our clients' information.

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Will my entire business be audited if I make a claim?

No. Only the SR & ED claim and costs will be reviewed by CCRA. The CCRA reviewers are separate from the regular CCRA auditors.

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Our accountants prepare all our taxes. Can't they prepare these claims for us?

We work closely with your accountants to prepare the SR & ED claim. We are specialists in this area, which can be very technical and is constantly changing. Many accounting firms use us for their clients if they think there is some SR & ED involved, since they do not have all the specialized expertise needed.

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What happens after I send in my claim?

If you are claiming for the first time, a Financial Reviewer and Technical Reviewer assigned by CCRA will visit your location to meet with you and examine your documents or information regarding the claim. Cookson Walker LLP can assist you in these reviews. Generally, most first-time claimants are reviewed by CCRA. If you establish a good track record, a review might be carried out every few years thereafter.

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Tell me about your SR & ED Workshops.

Particularly for large corporations, Cookson Walker LLP provides hands-on workshop seminars. We dissect, identify, and evaluate SR & ED using your Company's specific examples. Typically, the Company will provide us with information relating to two or three SR & ED projects. We will work with the Company and present in a workshop how the information should be gathered, evaluated, and documented. The result of the workshop is a project description and an evaluation of the qualified expenditures related to that project. We find this approach is very informative for large R & D departments, and for the managers and technicians who must gather and report SR & ED information.

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I have heard that the Ontario Government also offers SR & ED Tax Credits. Tell me more!

Provinces such as Ontario have expanded their eligibility requirements for refundable tax credits, enabling certain non-CCPCs to receive a cash refund, even though they are not eligible for a federal refundable credit.

In Ontario the Ontario Innovation Tax Credit (OITC) is 10% of qualified SR & ED expenditures. Also Ontario does not require the federal ITC to be added into income for Ontario tax purposes.

These criteria are constantly changing however, so please contact our office for an up-to-date assessment of your Company's eligibility.

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What is the general process for my Company to apply for a SR & ED tax credit?

There are essentially two components to making an SR & ED tax credit claim:

The first is to identify an SR & ED project and write a project description. Within this project description, you must identify the technological advances, uncertainties, and content. These three criteria must be discussed in the context of technology and not product development or business and marketing applications.

The second component is to identify the eligible expenditures that qualify as SR & ED, and give rise to the SR & ED tax credit.

Once the above is completed, federal forms T161 and schedule 31 must be completed and filed on time. Appropriate Provincial SR & ED forms may have to be completed as well.

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My Company is a large, US-based multinational corporation. Would such a large corporation be eligible for SR & ED Tax Credits?

Large, foreign-controlled or public companies Ð which are not eligible for the 35% refundable tax credit Ð are eligible for a 20% SR & ED tax credit. While this tax credit is not refundable, it reduces a Company's Federal tax liability, dollar for dollar. If a Company can't use its SR & ED tax credits in the current year, the credits can be carried back three years to recover taxes previously paid, or carried forward ten years to offset future federal taxes.

In certain circumstances large multinational corporations may be eligible for Provincial SR & ED tax credits, some of which are refundable even if no taxes are payable.

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How does the SR & ED fee structure work?

Typically, Cookson Walker LLP bills on a fixed fee basis. After an initial consultation Ð which is free of charge Ð Cookson Walker LLP will prepare a proposal that outlines our fee. Unless some material facts, or significant items, come to light during the course of providing our services, we will adhere to our fixed fee. We will also consider working on a contingency basis, wherein we are paid a percentage of the tax refund upon receipt by our client.

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Should I Finance SR&ED Tax Credits?

Many companies consider financing SR&ED to improve cash flow. Companies who have made SR&ED tax credit claims, can wait for from four months to over a year, before any refund of SR&ED tax credits is received. Sometimes, it may make sense to seek a financial institution or business which will finance or "factor" these tax credits.

Some key considerations are as follows:

1. Find out what type of institutions and businesses finance or factor SR&ED tax credits. There is a growing list each day of these type of organizations. Examine their terms and whether or not you qualify under their criteria.
2. Crunch the numbers. Essentially, you will have all the financial data in order to make a particular decision. You can typically provide a fairly good estimate as to how long you would expect to receive the SR&ED tax credits once you file. In addition, whatever organization you are dealing with, will set out its terms and charges under the loan or factoring arrangement. With this information, you can quantify within relatively precise terms, how much it will cost you to finance your SR&ED tax credits. This cost can then be weighed against the company's need for cash now, or what rate of return the company could generate by having this cash now rather than later.
3. Make sure the type of financial institution or business you are dealing with, fits your requirements. Financing packages can range from loans to factoring arrangements (i.e. the business "buys" your SR&ED tax credit). In addition, the security required by this wide range of financing organizations can vary. Make sure you understand all the terms of the financing arrangement.
4. Consider ways in which you can speed up your SR&ED tax credit refund. One sure way is to file within six months of your year end, thus effectively guaranteeing that you will get a cheque within four months from filing. If you wait longer than six months from your year end to file an SR&ED tax credit claim, you enter into "no man's land" and can in some cases, wait longer than a year for the refund.

Sometimes this decision can be complicated. In addition, you need to know what's available out there.

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What are your recommendations on filing a successful SR&ED claim to CRA?

The common errors found in most SRED claims are the follows:

1. Be clear and concise in preparing the project descriptions. It should be readable and understandable to the CRA. The description should only be two to four pages.
2. Please ensure that all prescribed forms are completed. This is includes the T661, S (31) and supporting schedules. The CRA can reject a claim if it is not complete.
3. It is important to list the documents supporting the claim. Only list supporting documentation, which is actually available. If you estimate your SRED labour allocations, please indicate this in your information supplied.

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