How to File a SR&ED Claim
The SR&ED program offers tax incentives to small businesses, Canadian-controlled private corporations, trusts, and partnerships. SR&ED expenditures are claimed. A tax credit is provided to offset some of those costs, reducing income for tax purposes.
SRED tax credits can also be received on qualified expenditures. They are provided either in the form of a cash refund, a reduction of tax payable, or sometimes both.
You should file an SR&ED claim if you are developing new or improved products, processes, materials or making incremental improvements to them. This should entail research and development, or R&D, and must be involved in solving a scientific or technological issue.
Let’s learn how to file an SR&ED claim.
What is SR&ED claim?
Salary or wage costs incurred for employees directly engaged in SR&ED work can be claimed. Materials can be claimed, including all raw materials, substances, or other items. When a claimant pays a contractor to conduct SR&ED on their behalf, the costs incurred for the portion of the contract related to SR&ED are claimable. Overhead and third-party payments can also be claimed in an SR&ED filing.
Not the entirety of a project will likely qualify for SR&ED benefits. This is where grouping eligible work together matters. You may be able to group all work into one SR&ED project, segregate eligible and ineligible work, or pull SR&ED work from different business projects to form one claim. As you do this, you will be required to adequately track and document the work you are claiming in your SR&ED application.
SR&ED claim deadline
The SR&ED reporting deadline for Canadian-controlled private corporations is 18 months after the tax year-end. After this period elapses, a party gives up their ability to claim those SR&ED expenditures.
How to calculate SR&ED
When calculating SR&ED expenditures, there are two ways to calculate your data – proxy or traditional. You must choose one and use it for the entirety of the tax year. The proxy method uses a formula based on expenditures for salary or wages to calculate a substitute amount for overhead and other expenditures.
The traditional method involves identifying each overhead cost related to SR&ED work and calculating expenditures that qualify for the investment tax credit. There’s more detail on the merits of each and how they work in Guide T4088 Section A, available through the Canada.ca website.
Tax forms for SR&ED claim
The primary form to outline deductible SR&ED expenditures is Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. Depending on your situation, you may also be required to submit the following forms:
- Form T1145, Agreement to Allocate Assistance for SR&ED Between Persons Not Dealing At Arm’s Length
- Form T1146, Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing At Arm’s Length
- Form T1174, Agreement Between Associated Corporations to Allocate Salary or Wages of Specified Employees for Scientific Research and Experimental Development
- Form T1263, Third-Party Payments for Scientific Research and Experimental Development
If you are a corporation, you are expected to fill out Schedule T2SCH31, Investment Tax Credit – Corporations. If you are an individual or trust, you should fill out Form T2038(IND) Investment Tax Credit (Individuals).
How to claim Form T661
Form T661 is fairly extensive in the documentation it requires beyond general information. Certain technical information is solicited. Calculations for SR&ED expenditures and project costs have to be accurate.
Be aware that, in some cases, a $1,000 penalty may be issued if the information requested about the claim preparer and billing arrangement is missing, incomplete, or inaccurate. If a claim preparer partakes in preparing the SR&ED form, the claimant and the claim preparer are generally jointly liable for the penalty.
SR&ED documentation
There is a lot of documentation the average SR&ED project generates. The more evidence you have, the better when trying to file an SR&ED claim. All data dated and specific to work performed should be kept, including project planning documents, experiment designs, technical drawings, project records, notes, project progress reports, test protocols, timesheets, payroll records, purchase invoices and proofs of payment. Any photographs, videos, scraps, or artifacts can also be kept.
Be sure to retain as many records and documentation as you can. The CRA may select your SR&ED application for a review and request additional documentation for clarification or confirmation. This is possible even when an SR&ED filing has already met all the requirements, which is why every applicant should maintain as many records as possible and hold on to them in case of a review.