itoctopus is publishing this article for the benefit of our Canadian customers who are not clear on what the R&D program actually is. Below you will find the Frequently Asked Questions (FAQ) on the SR&ED (Scientific Research and Experimental Development) program run by both the federal and the provincial government. This FAQ will help you…
- Fully understand what the Canadian R&D program is about
- See if the program is for your company or not
- Assess your projects to see which ones are eligible for R&D grants and which ones are not
- Know which resources can be claimed for R&D and which ones can’t
- Determine which costs (other than labor costs) can be claimed for the R&D grant
- Calculate the total amount of money to be claimed
- Understand how to prepare the necessary paperwork for the R&D grant
- Know what is the deadline for submitting the R&D document to the government
- Prepare yourself for a technical or a financial R&D audit
- Approximately know when the government will send you the check and how much it will send you
What Is the R&D Program?
Commonly known as the R&D program, the SR&ED (Scientific Research and Experimental Development) program is an incentive program run by the Canadian Federal government in conjunction with the Provincial Government to encourage companies that advance the field of technology. This encouragement comes in the form of non-taxable checks or a tax credits, depending on the size of the claim (lower claims are paid as checks, higher claims are paid as tax credits).
In order to qualify for the money, the company has to meet the eligibility requirements, has to have projects that qualify as potential technological advancements (in any field), and has to submit the necessary documents (technical and financial) to both the federal and the provincial program on time.
Is the R&D Program for Your Company
If you’re a Canadian based IT company that consists of more than 1 person, and that undertakes challenging projects that may advance the technological field if successful, then yes, the program is for your company, and thus your company may be eligible for a government grant.
Which Projects Qualify for the R&D Program?
Any project qualifies for the R&D program as long as it meets the following eligibility criteria:
- The project is executed in Canada. Note that if a project is executed in multiple countries, including Canada, then the company can only claim the work done (and project-related material bought) in Canada.
The project has advanced or may advance the technological field in one way or another by overcoming some technical challenges.
Which Resources Can You Claim for the R&D Program?
Any resource can be claimed for the R&D program, provided this resource meets the following criteria:
- The resource is a full time employee and is based in Canada (the resource has to pay taxes in Canada). Contractors, part time employees, and employees who work from outside Canada cannot be claimed for R&D.
The resource has actively contributed in the development or the management of one or more of the projects that are to be claimed. Designers and support personnel do not qualify as active contributors. Developers and project managers certain qualify (provided they meet the other criteria), and testers may qualify.
Note resources claimed for over 90% of their time to be working on R&D projects are automatically considered (by the R&D Program) to be working 100%. Another thing to note is that if the resource claimed is a shareholder in the company, then s/he can be claimed for a maximum of $150,0000. Also note that only the base salary can be claimed, bonuses (including quarterly, mid-year, and end-of-year bonuses) cannot be claimed.
Which Other Costs Can You Claim for the R&D Program?
There are some costs other than labor that can be claimed for the R&D program. These costs are mainly CAPEX (capital expenditures) costs, such as materials/products that were purchased mainly to support the claimed projects. Examples of R&D eligible CAPEX is software, servers, laptops, etc… Indirect costs such as rent and other bills cannot be claimed for R&D.
How Do You Calculate the Amount of Money to Be Claimed?
Let’s say you have 3 resources: Jane, Jack, and Jill. Let’s say that Jane worked as a developer 50% of her time on Project Gamma, which is a project that the company wants to claim for R&D. The other 50% of the time Jane worked on supporting the day-to-day operation. Jack worked as a developer 92% of his time on Project Gamma, while he spent the rest of his time fixing bugs on the company’s main product. Jill works as tier-1 support and have spent around 20% of her time testing the project. As for materials needed for Project Gamma, the company bought a software license for $10,000 and 2 servers for $5,000 each for the project.
Jane’s salary is $80,000/year, Jack’s salary is $100,000/year, and Jill’s salary is $40,000/year. All receive a bonus of $10,000/year each.
Now let’s do the calculation: Since Jane worked 50% of the time on the project, then we can only claim 50% of her salary, which is $40,000. Jack has worked 92% of his time on the project, and since he spent 90% or above on the project, then he is automatically claimed for 100% of his time, or $100,000. Since Jill’s title is support, then she cannot be claimed at all. Note that the bonuses cannot be claimed as well. As for the materials’ costs, it amounts to $10,000 + $5,000 x 2 = $20,000.
So, by doing a simple addition, we’re able to know the total amount to be claimed for Project Gamma, which is: $40,000 + $100,000 + $20,000 = $160,000.
What Are the Documents That You Need to Submit for the R&D Grant?
There are two several documents that you need to submit for the R&D Grant:
- The Tax Return of Your Company: You will need the tax return of your company for the previous year (the year you’re claiming for) to accompany your claim.
Form T661: A form that will contain the technical details about your project, along with the project start date, end date, capex and labor costs to be claimed (form can be found here)
Form T2SCH31: The investment tax credit form. This form is the one that will get you the money! You can find it here.
What Is the Deadline for the R&D filing?
Theoretically, there is no deadline, but realistically, you have to file the claim with your tax return by the end of July. Otherwise, you will not receive the money, and the processing of your filing may be delayed.
What to Do in Case Your R&D Application Is Audited?
It is the norm, and not the exception, for your R&D Application to be flagged for audit in case you’re a first time claimant. So relax! They just want to know if your claim is valid or not. If it’s not, then you just won’t get the claim. Always remember that the government wants to give you the money if you deserve it (this is an incentive program, after all)!
There are two types of audits for R&D claims:
- Financial Audit: In this type of audit, a couple of financial auditors will visit your company, their main task is to check that your numbers are correct. For example, if you’re claiming the right number of hours for each employee, and whether the hourly rate of each and every employee is correct. Financial auditors may ask for timesheets.
Technical Audit: In this type of audit, a couple of technical engineers will pay a visit to your company and check if the actual work claimed to be done in form T661 above was actually done. The technical auditors may speak to your team members if they doubt anything, and may also ask for demos and timesheets. (Notice the importance of timesheets in audits)
Note that usually you don’t get audited every year, but most likely you will get audited the first time you make a claim. Also, you may get audited when there’s a substantial increase in your claim from last year. We have also noticed that companies tend to get audited every 5 years or so, even if everything’s OK with their claim.
Here are the red flags that may lead to your claim being audited:
- You have substantially increased your claim from last year.
- You have beaten some of the project(s) that you’re claiming to death.
- Your company is surviving on revenue from claims. Your company is making little to no money and has no viable business model to sustain it.
- The projects that you are claiming have no obstacles, challenges, and do not advance the technological field in any way.
When Will the Government Pay Your Company and How Much Will It Pay?
If everything is in order, then expect to be paid by the federal government by October. The provincial government may take some extra time to pay you, but it will pay you eventually. Usually the provincial government pays you by February. The maximum amount that both governments will pay is 70% of the total claim (the maximum paid by the federal government is 35% and the maximum paid by the provincial government is 35%). So, in our example above of $160,000, you will get a maximum of $112,000. Note that you might be sent either a check or you may receive a tax credit depending on the size of your claim.
Quick Questions and Answers on the Subject
Q: How much will itoctopus charge me to do the technical reporting?
A: At least 40 hours. You can check our fees to see how much this will cost you. (We’re charging $250/hour at the time of publishing this article)
Q: What is the rejection rate for R&D claims?
A: According to multiple references, it is about 20% of all claims.
Q: How come most technology companies don’t benefit from this program?
A: Most technology companies do, but not a lot of people know about that.
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