You’ve probably heard the old adage that “nothing in life is certain but death and taxes.
Canada’s Scientific Research and Experimental Development (SR&ED) tax credit program can help your business recover up to 64 percent of your R&D and product development spend — but preparing a proper, accurate, and defensible claim isn’t always easy.
We caught up with Boast CRO and SR&ED expert Jeff Christie to pick his brain on the ins and outs of the program, and how companies can best position themselves to successfully claim this credit. Here’s what we learned (and find the full conversation here):
Can you claim overhead associated with projects?
Jeff Christie: The SR&ED program changed a lot in 2014 — you used to be able to claim capital and lease expenditures but that all got eliminated. There’s two ways now to claim overhead: a traditional method, and a proxy overhead method. I would say that 90 to 96 percent of the claims Boast submits use the proxy overhead method. This means you’re allowed to gross qualifying salaries up by 55 percent — essentially you’re getting 55 percent of your salary base that was spent on SR&ED eligible activities to cover your overhead.
Generally this is much more than if you counted every little thing that you think went into SR&ED eligible work.
Can claims be retroactive?
JC: Yes, you can go back up to 18 months. Take today’s date, count back 18 months, and if your year-end date lands within that 18 months, then you can claim that entire fiscal year. So companies that say, “well I’ve just been head-down, doing development for the past year and a half, I didn’t even know I could do this!” — you haven’t lost out yet. It’s important to start getting in the process of tracking your technical work — just because you haven’t thought of it, and you’re far along in your progress, doesn’t mean you shouldn’t be looking at it.
How often do audits happen?
JC: The Canada Revenue Agency (CRA) says they review 25 percent of claims that go in per year. Most companies claim every year because their R&D or experimental development is ongoing. So in theory, if you claim for four years in a row, you’ll get one review along the way.
The review temperament has been ebbing and flowing as the change in government is taking place, so it’ll be interesting to see how this year plays out when it comes to reviews. Bear in mind that reviews don’t necessarily mean that they’re going to deny your claim, it just means they’re taking a more in-depth look at it. We rarely see full claim denials, especially with the claims that we prepare.
Can I claim machines that I bought to perform R&D?
JC: This question comes up a lot, and unfortunately the answer is no, you can’t claim them directly. So, whether it’s a server, a software license, a computer, or any other R&D related machine, you can’t claim those costs directly — they’re meant to be included in the proxy overhead amount. If you encountered the SR&ED program pre-2014, you were able to claim those previously, but the government did some tweaking to try and reduce the scope of the program, and those types of costs were eliminated. So in general, you can’t claim machinery that you bought to perform R&D on.
Should we do internal audits?
JC: Well, anything that you submit to the CRA should already be “audited,” which means you should be submitting a claim you feel fits the mandate of the SR&ED program, and you’re claiming costs that are associated with it in a proper way. For example, at Boast, anything that we submit on behalf of our clients is already audited by ourselves so that we can be in the best and strongest technical and financial position. Ultimately I would say yes, you want to be very diligent about what you’re submitting to ensure that it qualifies for the SR&ED program, and that you’re not submitting a claim that has no basis.
If I don’t have documentation for my work, can I still claim for SR&ED?
JC: Yes, as long as your work qualifies, you can claim for the SR&ED credit. The risk profile — if that claim were to go to audit — increases in terms of denial, because if the CRA asks for substantiation and you can’t give it, then there’s a chance they’ll reduce or deny your claim. But there’s nothing in the tax law that says you have to have documentation to submit, you just have to have documentation to support.
What are some tools and technology you’ve seen over the last five years of doing this — aside from Replicon — that could be beneficial in this whole process?
JC: The right tool depends more on what works specifically for each business — the structure behind it is what’s most important. A lot of companies will ask me what tool they need, and my answer is always that I can’t recommend a tool until they tell me what they want to track and why. The tools we typically find most effective are the ones that intuitively track time or intuitively help track the technically documentation. This way, people don’t have to go out of their way to write or track too much, they can just go about their standard practices. Most of the time it’s not the actual tool but rather the company’s internal processes that need to be worked on.
What is an unusual situation that Boast has encountered over the years that relates to SR&ED, and is there anything that can be learned from that?
JC: There’s nothing bad really, because the work that we take on, we do it right. However, at times when we take over claims that have been prepared by others, the biggest issues are that the people developing the claim were more on the accounting side, and really didn’t understand the technology side. Essentially, the way it was framed didn’t fit the program at all, and now they’re in a significant review with the CRA.
Ultimately, you really have to make sure that you’re looking at everything through the SR&ED lens throughout the claim process, and know exactly what the program is trying to listen to and understand before you submit the claim.
What role does forecasting and future visibility play into all of this? Do you see companies planning well in advance?
JC: It’s more about getting the systems in place so that they don’t have to go out of their way to prepare for it. I always tell companies to never put their SR&ED money into a forecast, because it’s not guaranteed. If you’re doing something specifically for SR&ED, it’s probably not the best reason to do it.
Generally on the forecasting side going forward, we wouldn’t recommend anticipating the credit in your financial statements, but we would recommend having the right time tracking and development documentation in place so that when you encounter SR&ED work, it’s already being captured.
With the June 30th deadline coming up, what advice would you have for companies that need to get going on meeting that deadline?
JC: The June deadline is only for companies with a December year-end, so if you have a January year-end your deadline is in July. If you’re within a month of your deadline and you need to submit, call Boast (or a similar firm) and send me an email. It takes about 2-4 weeks to prepare a claim on a rush, and you need to understand quickly whether or not you qualify.
How does front-end development factor into SR&ED?
JC: The social sciences are excluded from the SR&ED program explicitly. So when companies are working on user experience and how someone is going to best interact with the product (colors, fonts, positioning, etc.) — those types of things are rooted within the social sciences, and therefore don’t qualify.
Are there any particular segments that people don’t often realize are eligible for the credit?
JC: Customer-paid work is a big one — people tend to think that if a customer paid them to do something then they can’t claim it. It’s actually the opposite. No matter the source of funds that come into the company — whether it’s equity, raising funds, or customer money — you can still claim as long as it’s technically eligible.
Professional services firms: are they generally eligible for the credit?
JC: As long as they’re corporately structured in the right way, then possibly. It may be that they’re developing a platform internally that seeks to deploy their solutions more efficiently — for example, something that automates client onboarding — and this work could end up being SR&ED eligible. It all depends on the nature of the work that companies are doing.