SR&ED Frequently Asked Questions, Answered by R&D Partners Experts
The federal scientific research and experimental development (SR&ED) tax incentive program (ITC) is one of the most generous in the world. As the largest federal funding program in support of business R&D in Canada, it awards more than $3 billion annually to companies that conduct eligible R&D activities. Compared to other programs, SR&ED is particularly accessible since it is industry agnostic and does not require businesses to be revenue-generating to be eligible for funding. However, its application process can often seem daunting – especially for new claimants – and its requirements are not always clearly understood.
We get questions about SR&ED all the time, so we decided to round up some of the more common ones and have the experts on our team answer them.
Debbie Frail, P. Eng., MBA
Debbie has spent her professional career managing engineering, operations, and project teams in several technology fields. For over 20 years, she has successfully worked with clients ranging from entrepreneurs to multinational corporations to prepare and defend SR&ED tax credit claims. Debbie works primarily in the manufacturing, automation, and transportation sectors.
Patrick Campana , P. Eng., MBA
Patrick has been managing engineering and project teams in several technology fields for over 18 years. Patrick specializes in preparing and defending SR&ED tax credit claims for companies of all sizes operating in the telecommunications, software, and manufacturing sectors.
How do I know if my project is eligible for SR&ED?
Patrick: SR&ED eligibility is based on a fundamental question: are you solving a technological uncertainty? If the current state-of-the-art technology available to you does not allow you to reach your technological objectives with a straightforward and known approach, your project is likely eligible for SR&ED tax incentives. However, the answer may not be that easy to ascertain depending on the situation.
Beyond technology specific criteria, the company’s size and experience in the field must be considered. Companies with extensive proprietary knowledge may have to push their experimental development efforts further than a less experimented company might need to do to qualify for the SR&ED program. Conversely, a small company entering an unfamiliar area of technology for them may need to first go through a learning curve before reaching the state-of-the-art level of competency from where they can start working with the SR&ED program.
Ultimately, there is no one-size-fits all answer here, and each project still has to be evaluated on a case-by-case basis to determine eligibility.
Want to know more about how to evaluate your eligibility for SR&ED? Read one of our previous articles all about the topic here.
What is the key to a successful SR&ED audit?
Debbie: First, proper documentation is key. Keeping accurate time sheets and recording material and sub-contracting expenses is essential to a successful SR&ED claim. Additional substantiating documentation to demonstrate the work done is also important. This can include records of tests carried out, analysis of results and conclusions made, meeting minutes, invoices, correspondence, modifications made to prototypes, and other contemporaneous information that can support the claim.
Additionally, it is important to be well prepared and knowledgeable as to the SR&ED program technical and financial tax requirements. For example, you can only claim the portion of an employee’s salary that is proportional to the amount of time they spent on eligible SR&ED activities – and not their entire salary for the year – unless they spent at least 90% of their time on activities that are eligible for SR&ED.
Want to know more about SR&ED audits and how to face them? Read our article dedicated to the subject here.
What is the best way to track my project activities?
Patrick: The CRA doesn’t ask for any specific ways to track the project. The most important thing is to always have dated documentation, and there are a few ways to make it as simple and useful as possible.
Tracking individual tasks with a project management tool like Jira is not always the most helpful: this keeps the focus on low-level individual tasks and often lacks linkages to claimed SR&ED activities. Using an overall project map that gives a bird’s eye view of the project – its stages, who is assigned to which tasks and the general timeline – can be a simple and very useful tool. It can help anyone who is not familiar with your project – like a CRA auditor – understand it as a whole. It is also a valuable resource to identify and justify which expenses can be claimed.
How should SR&ED program time be tracked?
Debbie: You can only claim the salaries directly related to SR&ED eligible activities. This would exclude work that does not directly support experimental development, such as routine software development and routine quality control testing. It is important to track both eligible and non-eligible SR&ED program time to ensure you can demonstrate full work periods, and also to enable you to reclassify time in the event eligible SR&ED program time was improperly classified.
The worst way to track your time is of course to not track it at all: it often leads to either a refusal or underestimation of the time spent on eligible SR&ED work. This means that you are potentially losing money you could have been entitled to.
We recommend and work with three different kinds of time tracking systems: 1) intelligent spreadsheets we have developed for very small R&D teams; 2) our very popular, automated pull time tracking solution (contact us for a demo!) that requires very little training or work; and 3) established, customized web and ERP time tracking tools. This last option works best in large enterprises with well installed systems and methods.
How do I differentiate between SR&ED hours and non-SR&ED hours in my timesheets?
Patrick: In most cases, it is not productive to ask individual contributors to classify their work as SR&ED or non-SR&ED in their timesheets, unless a project can be clearly circumscribed and identified as SR&ED work ahead of time.
Often, when a project encompasses both SR&ED and non-SR&ED activities, the final distinction can only be made retroactively, once one can determine what work went beyond the current state-of-the-art in an attempt to solve a technological uncertainty. Therefore, the important thing is to consistently label activities so they can later be easily retrieved and included in your SR&ED claim.
Artifacts naturally generated throughout the duration of the project – if they are dated and identify contributors and associated labels, will efficiently corroborate timesheet data down the road.
What is the best way to track my material expenses?
Debbie: We often suggest that clients set up specific G/L codes for material and sub-contracting expenses that are related to a SR&ED claim in their internal accounting system. Tagging them and keeping track for when the claim is filed – and in case of audit – is crucial.
What should I do if I already received government funding for the project? Am I still eligible for SR&ED?
Debbie: Yes, you are still likely eligible for SR&ED even if you received other government funding – a grant, for example – for your project. However, you have to be aware of the stacking limits and of how the government aid you received or are expected to receive could reduce your eligible SR&ED expenses – or even your ability to claim the SR&ED tax credit.
The important element is understanding the stacking limits of every source of government funding, as well as the allowable interactions between these sources of funding. Generally, more funding and funding programs are preferable. However, the cost of applying for, tracking, and reporting on the funding programs should be taken into consideration, as at some point additional funding programs will have diminishing or negative net funding returns.
Want to find out more about what to keep in mind when you apply for potentially competing government funding programs? Read our blog post all about it here.
If you have any questions about SR&ED that this blog post left unanswered, or if you are considering submitting a SR&ED claim, don’t hesitate to contact our team at: 1-800-500-7733, ext.2
Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific SR&ED claim by a dedicated consultant.