How To File for a SR&ED Tax Claim

Form for tax payers
In 2006, over $3 billion was refunded back to Canadian companies through the SR&ED program, as reimbursement for R&D expenditures!

The most astonishing fact that most companies overlook is that you do not need to employ research scientists to qualify for SR&ED. In fact, the majority of the successful SR&ED claims involve the experimental development or improvement of a new or existing product! In fact, if you can answer "yes" to any of the following questions, you may qualify for the SR&ED program:

  • Have you developed a new product?
  • Have you improved an existing product?
  • Have you improved an existing manufacturing process?
  • Have you conducted in-house R&D?
  • Have you developed software in-house?

To be competitive in the increasing global economy, companies much be technologically advanced. The federal Canadian government has many programs devoted to encouraging innovation; however, the Scientific Research and Experimental Development (SR&ED) subsidy is one of the largest of its kind. The SR&ED program reimburses Canadian companies up to 35% of the expenses incurred on R&D. The purpose of this program is to:

  • Ensure that Canadian companies maintain a technological edge in the global economy, and
  • Create jobs that are based in Canada.

Generally speaking, a Canadian-controlled private corporation (CCPC) can receive:

  • A 35% return (fully refundable in cash), or
  • A 20% tax credit, for all eligible SR&ED expenses.

The actual return is based on a sliding scale between the two categories, which depends upon the CCPC's taxable income from the previous year. On the other hand, foreign-owned private corporations and public corporations are eligible for a 20% tax credit for all eligible SR&ED expenses.

Step 1

Define the scope of your projects. According to the Canadian Tax Act, work that is eligible for SR&ED must adhere to the following 3 criteria:

  • Demonstrate technological uncertainty.
  • Demonstrate technological advancement.
  • Demonstrate systematic investigation.

It is recommended that the services of a Professional Engineer or SR&ED consulting firm be sought in order to properly define the scope of the SR&ED projects.

Step 2

Write a technical narrative to describe the scope of the projects, according to the 3 aforementioned criteria. A Professional Engineer or SR&ED consulting firm can help you to write this narrative.

Step 3

Capture all eligible SR&ED expenditures. These may include labour expenditures incurred within the physical boundaries of Canada, overhead expenditures, contractor expenditures incurred within the physical boundaries of Canada, current expenditures, and capital expenditures related to the scope of the SR&ED project(s).

Step 4

Forward the financial details, along with the technical narratives to your accountant for filing purposes. Your accountant will file the T661 and may have to amend your tax claim accordingly.

Step 5

Prepare for a CRA review. There will be both a technical and financial review. You will need to gather:

  • The technical supporting documentation to justify how the 3 aforementioned SR&ED criteria were met.
  • The financial supporting documentation that justifies your allocation of expenditures.

If you have hired an SR&ED consultant, he/she will help you with this step.

Step 6

Attend a SR&ED review. There will be both a technical and financial review. The technical reviewer will examine your technical supporting documentation in order to ascertain whether your claimed scope adequately exhibits the three SR&ED criteria: technological uncertainty, technological advancement, and systematic investigation. The financial reviewer will examine your costing procedures and allocation of expenditures.




Step 7

Receive a notice of assessment in the mail. The notice of assessment will detail any adjustments made by the CRA, after the SR&ED review.

 

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