Contrary to what you may have heard, your employees are not required to don white lab coats and spend their days peering intently at beakers overflowing with bubbling solutions for your company to qualify for the federal government’s Scientific Research and Experimental Development (SR&ED) tax incentive program.
Unfortunately, myths abound when it comes to SR&ED – and sometimes these misconceptions result in companies failing to receive rebates they have earned and have every right to collect.
The following are five of the most common myths surrounding SR&ED:
Myth 1: A company must specialize in scientific research to quality for SR&ED.
Fact: Just as there is no dress code, there is no requirement that your company be some cutting-edge player in pharmaceuticals or industrial chemicals. Nor do you have to have chemists, physicists on staff. It’s also untrue that the work has to be original or represent a breakthrough discovery. The reality is most SR&ED claims are for small advances in process, design, quality, durability, energy efficiency and so forth – the kinds of things ordinary companies across all sectors of the economy do every day to stay competitive.
Myth 2: It’s for big companies only.
Fact: This is another pervasive misconception that I hear repeated all the time. Canada Revenue Agency says plainly on its website that the SR&ED program is intended for “Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada.” Statistically, small and medium sized companies account for 75% of SR&ED claims, with eligible expenditures typically ranging from $20,000 to $2,000,000.
Myth 3: Our project doesn’t quality because it flopped.
Fact: Success, whether commercial or technological, is not a factor in the CRA’s evaluation of a SR&ED claim. The goal of the program is to encourage research and development activities that will lead to new, improved or technologically advanced products or processes. Even though an effort fails, the lessons learned and accumulation of in-house expertise can still offer benefits to the Canadian economy.
Myth 4: If your company doesn’t owe taxes, it can’t claim a refund.
Fact: SR&ED is fully refundable for Canadian Controlled Private Corporations (CCPCs). Even if a firm is in a loss position and owes no taxes, it can claim 100% of its SR&ED expenditures each year.
Myth 5: My accountant can handle it.
Fact: The SR&ED program represents one of the more specialized areas of the tax code. Indeed, the documentation filed in support of a successful SR&ED claim tends to have more in common with engineering than accounting. It takes a developed skill set to prepare a submission that will stand up to the CRA’s rigorous review methodology. In addition, an experienced SR&ED provider will be better able to determine what work qualifies and what does not, particularly when the research and development activities are somewhat obscure and non-intuitive. Bottom line, an experienced SR&ED professional is more likely to get you the full refund you’ve earned and have coming to you.
Fred Hausmann is the founder and senior managing director of Funding Research and Development Group Inc. (FRED), a business development and specialty tax service. FRED helps companies obtain the full amount of government funds and rebates, including SRED tax credits, they have coming to them. And then it helps them grow. Learn more about FRED’s services at fredgroup.ca.