Common Questions about SR&ED
Scientific Research and Experimental Development is the formal name of the program. It is a Canadian government program that allows companies and individuals to get a tax credit for qualified work deemed as eligible SR&ED. It is worth more than $3B annually and about 20,000 companies across Canada claim SR&ED each year. It is administered by the Canada Revenue Agency and claims must be filed within or 18 months after your Corporation Income Tax Return (T2) is filed.
There is a series of policies and criteria which guide what is SR&ED eligible work. In general, the work must follow a systematic investigation which came about from a technological uncertainty. This work then leads to a Technological Advancement. The key aspect is that the work has to be in a field of Science and Technology and thus excludes work done in the humanities, finance, sales/marketing and non-science areas. From this eligible work, costs are added for SR&ED related labour, contractors, overheads and materials to form the basis of eligible SR&ED expenditures. It is a broad guideline and is open for interpretation so its important the actual facts and activities are looked at closely by someone trained in SR&ED.
For most corporations that are privately owned by Canadians the SR&ED rate of return is set from a Federal SR&ED Investment Tax Credit rate plus a Provincial SR&ED Investment Tax Credit rate. There is some tax math involved but in general the SR&ED credit is approximately 64% of eligible wages, 33% of eligible contractors and 40% of eligible materials. These numbers may vary depending on the tax situation and structure of your company.
No. SR&ED only applies for work done in Canada. For SR&ED contractors, the contractors must be Canadian companies and/or individuals. There is a provision that up to 10% of the total SR&ED time of employees may be allocated to work done out of the country but in general SR&ED work must be done in Canada.
The SR&ED claim is filed using a CRA Tax Form T661. This form consists of the necessary filing information. In a tax return there are other schedules which must be completed to complete the SR&ED claim such as the Schedule 31 and Provincial SR&ED schedules if needed. This form is filed to CRA before the SR&ED deadline which is 18 months after your fiscal year end.
A SR&ED consultant like us will work with you to prepare all aspects of your SR&ED claim. The two main deliverables are the SR&ED project reports and SR&ED financial summary which complete the entries of the T661 form. SR&ED consultants also compile the necessary documentation for the claim and also may assist in representing the taxpayer with CRA in case of audit.
A SR&ED claim may consist of one or more SR&ED projects. Thus the work for a claim depends on the scope of work covered. Each project requires a report to be written on the work which identifies the scope of the SR&ED project, the uncertainties, the work performed and the advancements. The SR&ED claim also requires a financial work up of all the eligible expenditures. There is also time spent on ensuring that this information is entered and filed correctly with CRA within the prescribed time and format.
The CRA requires that documentation is kept for all SR&ED claims. The amount of documentation kept depends on the size of the claim, the nature of the business and business context. In general, you will need to have documentation that shows a nexus of the activity, the performer and time it took for the work which can be correlated to the claimed SR&ED work. This means that in most companies it would consist of a combination of emails, time records, timesheets, design specifications or requirements, work logs or tickets or any other form of documentation which can substantiate the SR&ED work.
Once the SR&ED claim is filed with CRA, the time to process a refund depends on the history of the taxpayer and other factors. In general, a claim that is filed should be processed within 2-5 weeks and a refund mailed within 3-5 weeks, if applicable. By signing up for CRA Direct Deposit, this can reduce the waiting time for a refund significantly. CRA audits can protract the time for a refund to 6-9 months.
Some stats have shown that around 20% of all claims are audited. There are various factors which dictate how frequently a taxpayer’s SR&ED claim will be audited. There are other tax risk factors and there are also randomly selected audits conducted by CRA. In general, we suggest that a taxpayer should be prepared to get a SR&ED audit when their claims have increased significantly in size.