Planning for your Scientific Research and Experimental Development (SR&ED) must take place in advance of actual research and development. This tax incentive program provides individuals, partnerships and corporations with possible cash refunds or reduction in taxes payable. The potential investment tax credit could total 15-35% of qualified expenditures.
The reporting deadline is generally 18 months after the company’s tax year end. More specifically, the deadline is 12 months after the filing due date for the year in which the expense was occurred.
While 18 months may seem like a gracious period of time to prepare SR&ED claims, expenditures are subject to review. The review process can take upwards of 6 months and therefore it is suggested to submit earlier to have recollection.
Is it SR&ED worthy?
Furthermore, expenditures must qualify under the SR&ED terms and the following questions must be asked:
- Does the work meet the definition of SR&ED? Typical arts or humanity work does not count. The following questions can help identify this.
- Was there a scientific or technological uncertainty? Whereby the problem could not be solved by standard practice, or there was a limitation of existing technology.
- Was a hypothesis created to eliminate the uncertainty? This can typically be the new invention at hand, or the idea of how to overcome the uncertainty.
- Was there a scientific procedure or method in solving the problem? Proof must be shown that the hypothesis was tested and further modified by testing results.
- Was a scientific or technological advancement the result of the work? This can include learnt outcomes of success or failure. As well as advancing the technology. Sometimes innovation does not necessarily represent a technological advancement. Changing the shape of a window is novel, but it is still a window.
- Were records of testing the hypothesis and results kept?
- If the work does meet the definition, what amount of the work does qualify? The following questions can help answer.
- How much work was performed as support work? This can include engineering, design, programming, data collection, etc.
- How much work is excluded, and not deemed support work? This includes market research, sales, QA, etc. For mining/oil/gas, this can include prospecting and exploration.
- What is the overall scope of the SR&ED project? This may not be inline with the company definition of the project. The duration start of a SR&ED project is when the technical uncertainty has been defined. The end is when the uncertainty has been removed.
Expenditures
First off, the rules vary from province to province and it is important to understand how they affect British Columbians in particular. The expenditures which are allowed to be claimed can be carried forward indefinitely. This includes: salaries, materials, prototypes, contract work, university costs, overhead (can be 40-50% of project) and certain testing. Work related to debugging is not considered under SR&ED. Coined the ‘Scientific research and experimental development tax credit’ CCPCs may claim a refundable tax credit for the lesser of:
- up to 10% of the expenditure limit (generally $3 million), or,
- corporation’s SR&ED qualified B.C. expenditures for the tax year
Furthermore, a non-refundable credit may be claimed for those expenditures in excess of the limit. This amount is 10% of the qualified expenditure minus the refundable amount and any amount renounced for that year. The non-refundable amount can be carried forward 10 years or back three years.
More information is available from the BC Government on their SR&ED page.
Contact one of our public business accountants for a free consultation to understand how your SR&ED claim can be successful.