On Saturday, June 26th, Asia America Innovation Alliance (AAIA) hosted an informational seminar on the topic of SR&ED. In this event, guest speaker Steven Yang (from YLH Advisory Group), a professional consultant with 10 years+ SR&ED advisory experience, gave the attendees an overview of the program and discussed how programs such as SR&ED can benefit companies.
What is SR&ED?
SR&ED (Scientific Research and Experimental Development) is the biggest single-source federal tax incentive program that encourages Canadian businesses of all sizes to do R&D in Canada. The SR&ED program provides financial incentives to qualifying organizations in R&D projects that help with scientific and technological advancements. Companies may be eligible to receive incentives in the form of refundable tax credit.
What expenditures are eligible to be included in SR&ED?
- T4-based Employee salaries
- Canadian Arm’s Length Subcontractors
- Third-party payment to Universities or Research Institutes occurred during the R&D process
- Material used for the research and development (consumed or transformed)
Generally, for CCPC (Canadian Controlled Private Corporation) the SR&ED program provides a refundable tax credit of 35% of qualifying expenditures up to $3 million on the federal level. Provincial level tax credit is also potentially available dependepent on the province where R&D activities take place. For example, with the proper setup of corporate and payroll structure, the optimized total SR&ED tax credit (both refundable and non-refundable) in Ontario can be as high as 65.55%.
How does CRA assess the eligibility of SR&ED: The “Five Question System”
Prior to using the “Five Question System”, it’s important to obtain a copy of the company’s last T2 filling to answer a couple of initial questions such as:
- Are you a CCPC?
- What’s your taxable income?
- Are there any associated companies?
- Did you apply for and received any forms of government funding/assistance?
In particular, SR&ED requires the claimant to identify technological uncertainty, and attempt to resolve the technological uncertainty by testing the hypothetical solutions. The iterative process of such experimental efforts may either support the hypothesis or be inconsistent with the original hypothesis, which requires a modified solution.
While a company needs to fulfill all these questions to have a qualifying SR&ED project, the claimant often finds it challenging in terms of the amount of documentation required for the claim as well as the types of documentation CRA prefers. For example, a software enterprise may retain source code and version control, and the R&D activities often generate records and time tracking for the experimental results and analysis and so on. While clear guidelines on the exact number of documents, and specific types of documents for various industry sectors are not provided, it will be requested by CRA during an audit reivew
Does a company need a SR&ED consultant in the process of a SR&ED claim?
Although SR&ED claims are not required to be submitted by a consulting firm, SR&ED consultants can often assist to make the entire process easier for the claimant and help to maximize the claimant’s benefits while balancing the risks.
Case Study 1
Case Study 2
Company X basic information:
- Service industry
- Company size: less than 10 employees
- Majority of the Development team is situated overseas
Company X is unsure whether they qualify for SR&ED. After consulting with Steven and learning more about the program and its benefits, they decided to move their team members to Canada. Company X claimed SR&ED after the structural change and was successful on the first submission without audit. This helped the Company to build a long-term R&D project plan to best utilize the financial support from the SR&ED program.
Company X basic information:
- Provide software products in railway industry
- Company Size: over 20 employees
Company X has been doing their SR&ED claim in-house in the past few years until a SR&ED claim was selected for audit by CRA, resulting in a big decrease in claim size. After consulting with Steven, the claim was re-strucured from both a technical as well as costing perspectives. This has led to an instant increase from $74,000 to $134,000 in ITC (80% increase) in the first year, and another increase from $134,000 to $196,000 (about 50%) in the subsequent year.
Case Study 3
Case Study 4
Company X basic information:
- Provide software products for e-commerce and digital retail solutions
- Company Size: over 30 employees
Company X worked with the Big Four accounting firm for the first SR&ED claim, but only received $55,000 ITC. The expectation for the 2nd year’s claim is about $100,000 using the previous claim method. After working with Steven, a different inclusion method was designed to fit the Company’s scenario to maximize the benefits. As a result, the total ITC of the SR&ED was increased from expected $100,000 to $409,000 without CRA audit.
Company X basic information:
- Provide battery products
- Technology is in the area of increasing photoelectric battery conversion rate, with different material and electrical design
- Company Size: less than 10 employees
Company X worked with a SR&ED consultant to file the claim. The claim was selected for an audit by CRA and the entire claim ($183,000) was rejected. After working with Steven who helped to build a chain of evidence to prove the SR&ED eligibility, a NOO (Notice of Objection) was filed, which turned out to be successful. As a result, $158,000 of the original claim was approved despite CRA denied the entire claim.
The key takeaway for all these case studies is to consult and work with a SR&ED expert with experience before jumping into conclusions.
What is OIDMTC (Ontario Interactive Digital Marketing Tax Credit)?
The OIDMTC is a refundable tax credit available to qualifying companies for expenditures related to the creation, distribution, and marketing of eligible interactive digital media products. A good example of an interactive digital product is mobile/PC games. Another qualifying type of product is educational tools for children under 12.
What are the eligible expenditures?
- Ontario employee salaries, wages, remunerations
- Ontario subcontractors
- Potential marketing and distribution expenditures
What does OIDMTC offer?
- all qualifying corporations that develop and market their own eligible products (non-specified products) are eligible to claim a credit equal to 40% of expenditures. These expenditures may include marketing and distribution expenditures (up to a maximum of $100,000 per eligible product for all tax years)
- qualifying corporations that develop eligible products under a fee-for-service arrangement (specified products) are eligible to claim a credit equal to 35% of expenditures
A non-specified product refers to a product that is developed for sale or licensing to arm’s length parties (not developed under a fee-for-service arrangement) and the product must be completed.
A specified product refers to a product that is developed by your own company under terms of an agreement with an arm’s length buyer or for sale/license to one or more people who deal at an arm’s length with the buyer.
When to apply for OIDMTC?
- At the end of your company’s tax year in which your specified or non-specified product has been completed
- New versions of website products can only be claimed every two years
Difference between tax credit & grants
Tax credit is an entitlement, which means you will receive the funding if the requirements are met. On the other hand, grant applications are competition based. The approval will be given to selected companies even if all the companies that applied have met requirements. The second difference is that tax credit is included in the tax return after the fact, whereas grants require approval before the project starts.
Other government funding/assistance opportunities to explore
If your company is in the marketing/export industry, you may consider applying for the following funding:
- Going Global Innovation
- Export Market Access
- Canadian International Innovation Program
- Innovation Solutions Canada
If your company is in the Environmental and Agriculture industry, you may consider applying for the following funding:
- Agri-Innovate Program
- Agri-Science Program: SMEs
- Agri-Marketing Program
- Agri-Assurance Program: SMEs
- CAP Market Access Streams
- CAP Develop New Products or Processes
- CAP Development & Commercialization of Technology/Equipment Streams
- Sustainable Development Technology Fund
- Low Carbon Economy Challenge: Partnership Stream
In addition to industry-specific grants/funding opportunities, there are programs to assist with your talent acquisition and training. Some of them include:
- Canada-Ontario Job Grant
- IRAP Youth Employment Program
- ICTC Career Connect
- NESERC Experience Award
- OCE TalentEdge: Fellowship & Internship Program
- Mitacs Accelerate and Elevate
- Career Focus: Agriculture and Agri-food Canada