Over the last couple of weeks I’ve learned a lot about government incentives for innovative work in Canada. To my surprise and pleasure I learned that a lot of the work we do day in and day out can qualify for some healthy incentives under the Scientific Research and Experimental Development (SR&ED) program. Not only do we qualify, but I’m disappointed that we did not know about this earlier.
The Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive program to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada that will lead to new, improved, or technologically advanced products or processes. The SR&ED program is the largest single source of federal government support for industrial research and development. Claimants can apply for SR&ED investment tax credits for expenditures such as wages, materials, machinery, equipment, some overhead, and SR&ED contracts.
What does it take to qualify?
As we learned, it’s pretty straight forward to become eligible. In our case through a given year we developed a handful of our own intellectual property, dealt with a great deal of technical uncertainty, gained new and proprietary knowledge about closed systems, independently solved a number of technical challenges through our own development efforts, and ultimately moved innovative technology forward. In our case, we did a lot of small innovative things that were interconnected and lead to a bigger solution.
If you think you may qualify for the SR&ED your boss will be very happy. BUT… it also means you need to document what did to back up the tax claim. This also turned out to be pretty straight forward. A paper trail is critical when claiming the credit. Make sure you do the following:
- Keep all of your emails
- Version and comment your codebase
- Retain meeting notes
- Log and document bug tracking issues
- Keep track of any team members who were involved in your projects and what they did
- Maintain a time line of key milestones
You’ll need all of this info when the accountants come knocking and if you do it proactively you’ll be very happy. (I spent a day and a half digging up proof… I was not happy wasting that time.)
Not an employee but rather an independent contractor? If you are taking on all the risk of the innovative work you may be eligible for the credit as well. It’s definitely worth talking to a tax expert.
At the end of the day the SR&ED is out there and waiting to be claimed. It takes a little bit of extra effort but if you are lucky it can really pay off. Worst case scenario you get turned down, best case scenario you walk away with some financial benefits.
We’ve been researching and in active development with this program for the last couple of months. It’s certainly worthwhile exploring.
One thing that might make the first time go easier, esp. if you don’t have the greatest documentation, is to hire a company that specializes in the process the first time around. The better ones will take a percentage of your claim, payable upon receipt. There are others that charge a flat-fee up-front too. Your mileage may vary.
The advantage of getting a professional company to help the first time around is their experience with the process, the documentation and the packaged final product you can use as a template for the next time around.
Good luck with it!
Chris makes a GREAT point. Get some help the first time around. Once you know what you are looking for and how to present your case you’ll be in a good spot. An expert will really help to find the most valuable bits of work and make the whole process much easier on you.
Selecting the proper SR&ED experts is becoming more difficult for small companies. Consult your tax accountant. There are some 300 “consultants” running around Ontario offering their “technical writing” skills, but only a few understand the complexities . Find someone with significant experience inside the government program (ie. a former Canada Revenue Agency SR&ED auditor) who really understands tax law, tax court rulings and the format that the reviewers want to see. It will save you grief at the audit stage if the government reviewers already know the quality of their work.
We (where I work) applied for this. We hired an independent consultant who’s been doing these applications for years. So we had to prepare documents that demonstrated how our research is a general advance in science or technology. We presented this to someone from the government and he says what we presented doesn’t show this. So I asked, how do YOU define that which is an advancement in science or technology? He describes it. Our consultant confirms his description and the guy agrees. Our work fell within his described requirements. So why is it not acceptable? So I re-iterated what our consultant had just said and the guy says, “no, that would not apply”. ??? So I then say, “How is what our consultant said correct, yet what I said, incorrect?”
It was all over at that moment. I have no idea what his criteria is. He’d outline it. I’d give an example and he’d say yes, that example is valid. Well, this is our research. Yes it is, and it’s not valid. (??!?!!!?!) Even the consultant we hired was smashing his head on the table. Every time we’d ask why our research is not admissible, he’d go into an example that mirrored our research and then say it doesn’t apply! We went in this circle 5 times. There were 7 of us at the table and not one of us could make sense of any of it. It died right on the spot. The consultant would call me after and ask, ‘can you re-define your material this way so it fits his criteria?’ and I’m like, WHAT criteria?! God what a freaking fiasco that was. I mean, so ridiculous that I’d swear the program was created to pay people to say no and make no sense whatsoever.
If you plan on applying for this, be prepared for something akin to a parole hearing. Except they’ll deny your parole because they think you’ve been rehabilitated and should be released.