SR&ED Tax Credits

Encouraging Canadian R & D activity is a cornerstone of the Canadian government’s economic policies. The government’s success in providing a funding mechanism for innovation can be seen in the number of world-class technology companies that have grown from Canadian origins.

Even if not primarily a high-technology company, a business may still be eligible to claim scientific research and experimental development tax credits if it performs such activities. These tax credits are available to any company that carries on a research program in a scientific manner, where this research involves technological uncertainty and innovation.

In collaboration with our affiliated entity, Scitax Advisory Partners LP, we assist Canadian businesses in maximizing the tax benefits of their R & D activities by providing R & D tax consulting services and assisting with the claims process.

Our team helps clients:

  1. document  research activities on a project-by-project basis;
  2. cost the amounts spent on each project in accordance with generally accepted accounting principles, modified by certain rules in the Income Tax Act; and
  3. claim tax credits by completing certain information on tax returns.

Because the investment tax credits are so lucrative, the potential recovery far outweighs the costs involved. Provincial tax credits may also be available.

Identifying and Documenting R & D

We regularly meet with company representatives to review the company’s R & D activities and determine whether they qualify for tax credits. We explain in detail and in clear, plain language how R & D projects should be documented for submission to tax authorities. If warranted, we prepare technical descriptions of the R & D projects or review what the company has prepared.

We can give clients guidelines on how to maximize their eligible R & D activities. Where necessary, we retain engineers and scientists as outside consultants to assist in documenting the technical details of R&D projects.

As such, a complete package can be prepared with documentation of the activities, costing information, and the required tax forms for submission as a complete package.

Costing R & D Projects

We determine and document how much money was actually spent on each R & D project. This involves allocating salary costs and direct and indirect overhead, and determining the usage of materials, supplies, and equipment using cost accounting and corporate accounting systems.

We can prepare or review the project costings and provide assistance to capture the costs efficiently. This process requires a detailed knowledge of income tax because certain costs are not eligible for an R&D claim. Other costs (particularly overhead costs) can be taken at a set 65 percent of direct costs, which is usually better than a specific apportionment.

Claiming the Credits

R & D tax credits are claimed on a tax return using prescribed forms. These must be filed within one year of the tax return’s normal filing deadline (which is 6 months after year-end for a corporation). If these forms are not filed on a timely basis, no credits can be claimed for that year.

For Canadian-controlled private corporations, a portion of the R & D tax credits can be refunded. Otherwise, the credits apply only against taxes payable, but can be carried forward for 20 years or back for 3 years.

Many provinces have their own incentives for R & D carried on within their boundaries. These are claimed on provincial tax returns.

We can prepare or review the company’s tax returns (federal and all provinces) and work to optimize the claim. We maximize the amount refundable by considering the company’s overall tax position, tax rate, provincial tax position, ownership structure, and discretionary tax deductions. By specializing in R & D tax credit filings over many years, we have developed a series of effective tax-planning strategies.

Review by Tax Authorities

Most R & D tax credit claims (and all first-time claims) are audited by the tax authorities. The process is rigorous because of past abuses.

The technical descriptions are reviewed by a science officer, a person designated by the tax authorities who has a scientific background and an understanding of the income tax rules on what is eligible R & D. He or she may visit the company to verify the accuracy of the project descriptions and to judge whether they meet certain guidelines.

If the projects are eligible, the next phase is verifying the composition of costs. This phase involves a tax auditor with experience in R & D.

We assist in all phases of the audit by answering queries and overcoming obstacles in the process of claiming the tax credits.