What is SR&ED?
The Scientific Research and Experimental Development (SR&ED) program was established by the Government of Canada to encourage Canadian businesses to conduct research and development activities. The Canada Revenue Agency is responsible for the administration of the SR&ED program. The SR&ED program is the largest source of federal government assistance for research and development.
In order for a project to qualify under the SR&ED program it must meet the following three criteria:
Scientific or technological advancement – The work must generate information that advances the understanding of scientific relations or technologies.
Scientific or technological uncertainty – Whether a given result or objective can be achieved, or how to achieve it, is unknown or cannot be determined based on generally available scientific or technological knowledge or experience.
Scientific and technical content – There must be evidence that qualified personnel with relevant experience in science, technology, or engineering have conducted a systematic investigation through experiment or analysis.
In 2012 the CRA switched from “3 criteria” approach to “5 questions” approach. The below questions each RTA must address in their report on each claim they review.
1. Is there a scientific or technological uncertainty – an uncertainty that could not be removed by standard practice?
Scientific or technological uncertainty
2. Was a hypothesis formulated specifically aimed at reducing that uncertainty?
Scientific and technical content
3. Was the procedure adopted consistent with the scientific method, including formulating, testing, and modifying the hypotheses?
Scientific and technical content
4. Did the process result in advancement?
Scientific or technological advancement
5. Was a detailed record of the hypotheses tested and the results kept as the work progressed?
Scientific and technical content
In order for an activity to be eligible under the SR&ED program, the work must meet the legislated requirements. In particular, the work must fall into one of the following categories:
Experimental Development – Activities performed to achieve one or more technological advancements. The advancement can take the form of the creation of new technologies, incremental improvements, new materials or devices, products or processes.
Applied Research – Work done to advance scientific knowledge with a specific practical application in view. Basic Research – Work done to advance scientific knowledge without a specific practical application in view.
Support Work – Activities that directly support the needs of experimental development, applied research, and basic research. Only the specific tasks outlined below may fall under this category:
• operations research;
• mathematical analysis;
• computer programming;
• data collection;
• testing; and
• psychological research.
The following categories of work are not eligible for submission under the SR&ED program:
• research in the social sciences or the humanities;
• commercial production of a new or improved material, device, or product, or the commercial use of a new or improved process;
• style changes;
• market research or sales promotion;
• quality control or routine testing of materials, devices, products, or processes;
• routine data collection; and
• prospecting, exploring, or drilling for or producing minerals, petroleum, or natural gas.
While first time claimants sometimes are allowed to use reasonable estimates for their SR&ED claims, the Canada Revenue Agency emphasizes the importance of keeping supporting contemporaneous documentation and requires that organizations filing SR&ED claims differentiate between routine development activities and SR&ED eligible activities. MCN can help your organization implement non-intrusive time tracking processes and other compliance measures that can simultaneously maximize your SR&ED claim, and provide the necessary supporting documentation for the CRA.
From time to time, the CRA will pick an organization for either a financial, technical, or combined (i.e. financial and technical) review. The purpose of these reviews is to verify the validity of the SR&ED claim, to ensure that the organization understands how to differentiate SR&ED eligible activities from routine work, and ensure the appropriate costs are being captured. SR&ED reviews are limited to a review of the SR&ED claim being processed and do not trigger full financial audits of the claimant.
A SR&ED claim must be filed within 18 months of the end of your organization’s fiscal year. For example, if your organization’s fiscal year end is December 31, 2009, a claim for the fiscal year must be filed by June 30, 2010. Typically, claims are filed along with your organization’s corporate taxes but may also be filed as an amendment to an already filed tax return.
A joint filing is when your organization submits its corporate taxes along with all of the necessary documentation for its SR&ED claim. For refundable claims filed jointly, the CRA will typically process your claim within 120 days. Non-refundable claims may take up to 365 days to process.
An amended filing occurs when a SR&ED filing is submitted after the corporate tax filing for the same fiscal year has been submitted to the CRA. For refundable claims filed as an amendment, the CRA may take up to 240 days to process your claim. Non-refundable claims may take up to 365 days to process.
A SR&ED claim can be filed by virtually any entity conducting eligible work within Canada. Canadian controlled private or public corporations, foreign corporations, sole proprietorships, partnerships and other entities who are required to complete a T1 or T2 tax filing are eligible to claim SR&ED.
The CRA maintains strict information security and confidentiality procedures. The CRA is well aware that the information they receive under this program constitutes sensitive intellectual property, and its dissemination may affect an organization’s ability to compete. The CRA has enacted policy to ensure that SR&ED information is communicated on an as-needed basis, to the appropriately authorized personnel. At Mobile Capital Network, we are acutely aware of the need for confidentiality and information security. We employ several measures to ensure that all information is kept secure, and is only made available to our consultants on an as needed basis. In addition, all of our standard agreements contain confidentiality clauses and Mobile Capital Network will sign your organization’s confidentiality agreements if further security is required.
One of the purposes of the SR&ED program is to increase competitiveness of Canadian-based companies. The Income Tax Act does not require SR&ED projects to be commercially viable or have a commercial purpose. As long as the work undertaken meets the SR&ED eligibility criteria from a technological perspective and eligible expenditures have been made, then the project will qualify. Thus internal projects, skunk work projects, and experimental works may all qualify under the program regardless of their commercial status.
The ‘proxy’ method is a simplified method for the inclusion of SR&ED related overhead costs. Using this method, wages, materials, subcontract costs, leased costs and capital equipment may be claimed. More importantly, using the proxy method, wages are eligible for a 55% proxy increase to accommodate overhead costs. Due to the simplified filing requirements and relatively generous overhead calculation, the proxy method is the most popular method of filing a SR&ED claim.
The ‘traditional’ method for filing an SR&ED claim allows for the inclusion of specific overhead costs related to an SR&ED project, rather than using a general calculation for factoring overhead costs (as used in the proxy method). This method is typically used in organizations where salaries and wages are low, or compose a small fraction of the costs incurred in SR&ED eligible projects.
One of the major benefits of the SR&ED program is that returns are often in the form of cash. Depending on its corporate structure, your organization may be eligible to receive its SR&ED return as cash, or a mix of cash and tax credits. Because the SR&ED program works on eligible expenditures, having no taxable income will not affect your organization’s ability to participate in the program. To determine whether your organization is eligible to receive a cash return for eligible work/expenditures, please call us at 416.640.0620 or email us firstname.lastname@example.org.
The CRA has established service standards for the processing of SR&ED claims. The CRA is committed to meeting these standards at least 90% of the time. Typically, cash refunds on joint filings are processed within 120 days, and 240 days for amended filings. In our experience, the CRA is often able to process the claims faster than the timelines noted above. For non-refundable claims, the CRA attempts to process claims within 365 days.
The CRA accepts a wide variety of information in support of a SR&ED project. Although this information is generally not included in the technical submission, your organization should be able to easily produce supporting information in the event of a claim review. Supporting documentation can take the form of:
• Project planning documents
• Records of resources allocated (time sheets)
• Design of experiments
• Project records, laboratory notebooks
• Design, system architecture and source code
• Records of trial runs
• Progress reports, minutes of meetings
• Test protocols, test data, analysis of results, conclusions
• Photographs and videos
• Samples, prototypes, scrap and other artefacts
• Other project related materials
In certain provinces, public companies are still eligible to receive cash as a part of their SR&ED return. For example, in Ontario, depending on the amount of taxable capital, an organization may still be eligible to receive the provincial portion of its return in cash. Although the OITC is 10%, through the addition of the proxy amount for overhead, and the federal/provincial refund split, almost a third of return can be refunded as cash in Ontario. Alberta, Quebec, New Brunswick, Newfoundland & Labrador and Nova Scotia provincial governments also give public companies cash returns. To determine if your publicly traded corporation meets the criteria to receive provincial cash returns, please contact us.
Yes. Although most government funding assistance programs prevent the filing of SR&ED on government provided funds, your organization is still eligible to claim SR&ED on privately funded portions. For example, IRAP funds a portion of employee salaries and subcontracts. The portion your organization is required to co-fund is still SR&ED eligible. Moreover, if government assistance is in the form of interest-free or low interest loans, then the re-payable amounts are SR&ED-eligible once the repayments are made.
The table below indicates the current SR&ED tax credits offered in addition to the federal tax credits. Please note that each province has specific criteria in order to receive the indicated tax credits.
Newfoundland & Labrador
8% – Yes
Prince Edward Island
Yes it is possible. You can receive a substantial percentage of the expected return upfront. Please contact us for details.
Mobile Capital Network provides two major SR&ED offerings. The first package is an end-to-end service, where MCN consultants prepare the entire SR&ED claim for an organization. This is the most typical type of service utilized by our clients. The second offering is an educational service offering, where we work with an organization to develop processes to create supporting documentation for SR&ED claims in the normal course of business. Please see the questions below for a complete description of each offering.
The MCN end-to-end service consists of four major components. Typically, the entire process requires an investment of 6-8 hours on the part of your organization. MCN can typically complete a SR&ED claim within 3-4 weeks, and can accommodate quicker turnarounds in the event of a submission hard deadline.
Technical Report Preparation – Our technical consultants will interview your SR&ED participating technical staff. Typically, each interview lasts about 20-30 minutes per project, and requires no prior documentation on the part of your technical staff. Once the interviews are completed, your MCN technical consultant will prepare a complete technical submission for your SR&ED claim.
T661 and Costing Preparation – Our financial consultants will work with your financial staff to gather all of the information required to complete a comprehensive costing analysis for each SR&ED eligible project. This includes preparation of the T661 and the supporting schedules.
Proactive Time Tracking and Compliance Assistance – One of the requirements of participation in the SR&ED program is to track time associated with SR&ED projects. This requirement does not need to be as cumbersome as often thought. MCN consultants can assist your organization in implementing a time tracking regime that is tailored to your organization’s internal processes. MCN consultants can also provide seminars to your employees over the course of the year to ensure that all eligible activities are tracked, and employees understand the requirements of the SR&ED program.
CRA Claim Review Assistance – In the event of a CRA review, MCN consultants will assist your organization prepare for the audit. First, MCN consultants will work with your team prior to the audit to ensure that they understand the various components of the submission. In addition, MCN consultants will attend the audit and assist your team in providing support for your SR&ED claim. Typically, all of the services noted above are provided for a single, contingency-based fee. For more information, please contact us.
The MCN educational service consists of three major components. This service is geared towards organizations who wish to complete their SR&ED claim internally, but would like third-party assistance with procedural items.
Technical Report Review – Although MCN technical consultants will not prepare your organization’s SR&ED technical submission, they will review the project reports to ensure that they conform to CRA requirements. In addition, MCN technical consultants will provide advice and direction on how to improve the contents of your organization’s technical submission.
Staff Seminars – MCN consultants will provide educational staff seminars on-site on a quarterly basis (or more frequently if required). MCN consultants will review the program requirements with attending staff to ensure they understand SR&ED eligible work versus routine work. This time can also be used by organizations to pose questions to MCN consultants regarding the eligibility of specific tasks already undertaken. Hard and soft copy materials will also be provided to help your staff understand the program.
CRA Claim Review Assistance – In the event of a CRA review, MCN consultants will assist your organization prepare for the audit. MCN consultants will work with your team prior to the audit to ensure that they understand the various components of the submission. Typically, all of the services noted above are provided for a single annual fixed fee. For more information, please contact us.
Yes. When a client engages Mobile Capital Network to provide its end-to-end SR&ED services, MCN will provide all of the encompassing services for a single contingency fee. Moreover, there are no hidden costs, additional expenses etc., when MCN is engaged on a contingency fee basis.
Yes. MCN regularly assists clients with the implementation of tracking solutions in support of their SR&ED claims. MCN consultants can assist your organization in designing a time tracking solution that minimizes the impact on your organization, while simultaneously ensuring all eligible SR&ED activities are tracked. This assistance is an integral component of MCN’s end-to-end SR&ED service. This service is also offered on a time and materials basis. For more information, please contact us.
Mobile Capital Network is a national strategy consulting practice, headquartered in Toronto, Ontario, and the offices in Vancouver, BC, and Calgary, Alberta. MCN has consultants and clients nationwide.