3 ways to optimize your Canadian SR&ED tax credits
Does your business conduct research or experimental development but not claim the SR&ED tax credit? If so, you’re leaving a good bit of money on the table.
In Canada, the Scientific Research and Experimental Development (SR&ED) tax credits aim to encourage companies to undertake projects with more risk, spend more on technical product and process development, and remain competitive in a global market by pursuing technology- and innovation-related ventures.
Though all members of G7 countries have some kind of Research and Development (R&D) tax credit program in place, Canada’s SR&ED program is one of the most generous in the world, ultimately doling out around $4 billion annually to Canadian companies of all sizes. And yet, each year businesses miss out on these credits because they don’t have proper documentation for approval in the eyes of the Canada Revenue Agency (CRA).
With the SR&ED program, your business could recover up to 64 percent of your R&D and product development spend, so arm yourself with sufficient information to ensure that you capitalize on this incredible opportunity:
Track R&D tasks in real time
Any great SR&ED claim starts with great documentation. In order to receive the tax credit, claimants are supposed to document all activities — demonstrating not only why each major element of the SR&ED project is required, but also how each activity fits into the project as a whole. In the CRA’s document outlining the SR&ED Salary or Wages Policy, it should come as no surprise that the terms “documentation” and “record” are mentioned more than 40 times throughout (particularly in Section 8.2: Supporting Documentation, and Section 13.3: Labour Allocation).
To be as precise as possible, you should establish specific metric indicators to measure progress and determine whether goals are met. Ideally, these need to be identified and documented from the earliest stages of work. In establishing metrics and processes to consistently capture and collate data in real time, you arm yourself with the specific, detailed data you need to pass any CRA audit. And, in capturing project progress as it occurs, you can constantly compare projected vs. actuals and adjust your estimates accordingly.
Collect granular data to justify claims
As touched on briefly before, the best claims don’t use vague data — you need to track hours and cost breakdown per user per project. The CRA’s documentation recommendations to claimants during an audit are typically something like this:
- Documentation should demonstrate the process of a systematic investigation, including the formulation of a hypothesis, and the relevant activities of testing in an identified field of science or technology.
- Documentation should show who worked on which projects for what amount of time, to connect salary and material expenses to eligible SR&ED activities.
While the CRA’s policy does not specifically require the claimant to employ a sophisticated time and project tracking system, it’s been shown time and time again that, in practice, CRA auditors seek out far more granular, activity- and task-based time tracking (as demonstrated in recommendation #2). The larger your SR&ED tax claim, the more granular details you should provide.
Increase forecasting accuracy with historical data
Though granular data is typically most important, your claim can be bolstered with the help of historical project data as well. If you collate historical data from past projects, you can draw on this information to help prepare for future R&D projects and SR&ED tax claims.
With historical data as a resource, you can access past project and tax credit info to conduct your own self-audit, and help your business determine where you might come up short in terms of successfully passing a CRA audit. Additionally, historical data can enable you to associate an informed estimate with your future SR&ED tax claim on an ongoing basis, and use this to help inform financial planning
