Individual consultants developing software for clients on a subcontract basis that also develop their own proprietary software regularly approach us at MCN. Quite often their proprietary software  is of an experimental nature and qualifies as SR&ED eligible work.

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The amounts owners/managers can claim is limited by their company’s structure, or the manner in which they compensate themselves. While the selection of a particular business structure as well as the choice of a given compensation arrangement are often seen as a tax planning exercise, SR&ED is rarely factored into the equation.

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Here are some things you may want to consider:

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1. Incorporate. As a Canadian Controlled Private Corporation (CCPC) your business can take advantage of substantially higher SR&ED return rates. As a CCPC, your SR&ED benefits may be refundable whereas as a sole proprietor you are only eligible for a non-refundable tax credit.‍
2. Salary. As of 2008, an owner performing SR&ED-eligible work can claim up to $224,500 of his/her salary as a SR&ED expense. The regular T4 salary of the owner, up to $112,250, is further eligible for proxy overhead calculations. If you pay yourself as a contractor, your compensation is not eligible for the proxy overhead. Payments made as shareholder loans, dividends or bonuses cannot be claimed under SR&ED.
3. ‍Salary Accrual. If you don't have cash to pay yourself right away, accrue a salary. Accrued salaries are eligible for SR&ED as long as they are paid within 180 days of the company’s fiscal year end.

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There are many other issues that may affect your ability to claim SR&ED. For example, your contract may be worded so that your ability to claim SR&ED is questionable. You need to be careful with the way you invoice your client as there are only so many hours you can legally claim as time spent on SR&ED. If you are an owner/operator of a business and your work involves SR&ED, make sure it's an integral part of your tax planning!

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