Plan ahead to cash in on R&D tax credits
By Brian R. Leve, Mintz & Partners
The federal government's Scientific Research and Experimental Development (SR&ED) program returned more than $1.5 billion to more than 11,000 companies in Canada in 2001. Many companies are performing activities that qualify for this credit but do...
The federal government’s Scientific Research and Experimental Development (SR&ED) program returned more than $1.5 billion to more than 11,000 companies in Canada in 2001. Many companies are performing activities that qualify for this credit but don’t even know it.
SR&ED credits can add up to significant amounts for any company. The average tax credit or refund from our experience is more than $150,000 and can be much greater. The key activities that need to be accomplished to realize these benefits include determining eligible projects; claim preparation and submission; financial reporting; and post-submissions audit process.
Given the complexity of these submissions, a company needs to ensure that the submission meets government standards and that the costs associated with the projects included in the submission are fairly valued and properly characterized.
Plan ahead and keep records
In order for any costs to be eligible, the claimant must keep specific project records that correspond to each SR&ED project. These costs include:
directly engaged salaries and wages;
overheads and other direct costs associated with SR&ED;
materials consumed in the SR&ED work;
leased equipment or applicable capital equipment, purchased, to be used at least 90% in SR&ED;
payments to contractors and sub-contractors;
incremental overheads and indirect costs incurred due to the SR&ED projects or use a formula for determining the prescribed proxy amount for the ITC calculation.
Certain costs never qualify even if they are incurred for SR&ED purposes. These include, interest, building rent, legal and accounting fees, and work performed outside Canada.
Do you qualify?
Here are some examples of where you may have undertaken SR&ED expenditures:
have you changed a process to improve your operations and reduce costs?
have you created a new product, made improvements or added new features to an existing product or built a prototype?
are you involved in engineering, design, data collection, testing or other development work?
As you can see, SR&ED is very complex and contains many traps and pitfalls for the unwary, but for many, the rewards are well worth the effort.
Brian R. Leve is a senior Tax Manager at Mintz & Partners. He can be reached at 416-644-4426 or brian_leve@mintzca.com.
A guidance document for the plastics industry regarding SR&ED claims is available at www.plastics.ca/SRED or at the Canada Customs and Revenue web site.
