SR&ED: What’s the Deal With Double-Dipping?
When companies partake in multiple government funding programs, tax credits, grants, contributions etc, the issue of of ‘double-dipping’ often arises. There seems to be a lot of confusion around the concept of double-dipping and in this post we will attempt to clear some of them.
Double-dipping can take one of two forms: (1) two or more companies claim the same expenditures under the same program (e.g. SR&ED) (2) the same company claims the same expenditure several times for various programs (i.e. SR&ED, OIDMTC, OMDC IP Fund etc).
With respect to point (1), the CRA states, “…only one Canadian claimant should benefit from the ITC incentives on any SR&ED contract”1. Thus, claiming the same expenditure from two companies is a form of double-dipping that is explicitly prohibited.
With respect to point (2), companies are generally allowed to submit their qualifying expenditures to multiple tax credit programs. When the same project or activity qualifies for more than one government assistance program, claimants may theoretically qualify the same expenditures several times. To prevent double dipping, in such a case the claimant must declare amounts of assistance already received or expected to be received. When this happens, a ‘grinding’ effect occurs, since the funds received from one incentive reduce the expenditure pool available for the other incentive.
For example, let us look at Company A, an Ontario-based CCPC filing for both SR&ED and OIDMTC. For the purposes of this example, let us assume that their SR&ED expenditures qualify for OIDMTC in their entirety.
Qualifying SR&ED Labour Expenditures: $100,000
Approximate SR&ED Benefits: $100,000 x 72.8% =$72,800
Qualifying OIDMTC Labour Expenditures: $200,000 (inclusive of claimed SR&ED expenditures)
Less Other Government Assistance (SR&ED): $200,000 – $72,800 = $127,200
Approximate OIDMTC Return: $127,200 x 40% = $50,880
Total Tax Credit Return: $72,800 + $50,880 = $131,680
Looking at the example above, the important part of the calculation is that the OIDMTC expenditure pool is not reduced by the $100,000 in expenditure claimed under SR&ED, rather it is the $72,800 that was actually claimed.
It is also widely perceived that the order in which tax credit filings are performed will affect the amount you receive through the various programs. With respect to the amount of money available to the company, this is not the case2. As long as you properly keep track of qualifying expenditures and apply for various incentives within set deadlines, the grind will always get calculated such that you receive the same benefit.
Having said that, a strategy optimal for one company may prove to be sub-optimal for another. There are many things one needs to consider when applying for multiple funding programs and tax incentives. For example, the order in which the company applies for various programs may greatly affect the company’s cash flow. The ability to secure funding from certain programs may be viewed as “implicit proof” of the work being eligible for other programs, thereby greatly increasing the chances of securing financing from multiple sources.
At Mobile Capital Network, we create and implement comprehensive R&D financing strategies that allow our clients to access various funding programs available at each stage of a company’s life cycle. For more information, please, contact us.
1 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/p02-03-eng.html
2This example assumes that the $100,000 claimed under SR&ED is half of the total Labour shown for OIDMTC. When doing the reverse calculation, the amount of government assistance to reduce the SR&ED claim by is $40,000, not $80,000, since only half of the OIDMTC labour would be considered SR&ED eligible.