Top 10 misconceptions about SR&ED tax credits

The SR&ED (Scientific Research and Experimental Development) program is aimed at providing tax incentives to encourage research and development in Canadian companies. The program provides more than $3B in tax incentives to more than 20K Canadian companies each year.

Businesses often don’t fully understand the benefits of the program and therefore don’t identify their opportunities for SR&ED eligibility. As various myths surround the program, it’s often difficult to determine if applying is worthwhile.

In this article, we’ll look at some of the myths to help you better understand SR&ED eligibility.

1. My company’s finances will be audited fully if I file an SR&ED claim.

   The Canada Revenue Agency (CRA) is only interested in your SR&ED-related technical content and expenses once you have applied for the SR&ED program. They won’t have to audit all your finances to determine eligibility.

2. SR&ED expenses can only be claimed for successful projects.

   Unsuccessful projects are still eligible. The SR&ED tax incentive program’s goal is to motivate Canadian companies to attempt to solve technical challenges.

   An unsuccessful project actually confirms that there are challenges. Failure only means that more research and work are needed to overcome them.

3. Companies that already received government funding are not eligible for SR&ED funding.

   The SR&ED program is not a voucher or a grant, but awards generous tax incentives to individuals or businesses that conduct research and development activities.

   Companies can receive both SR&ED tax credits and government funding.

4. Projects not completed within this calendar year don’t qualify.

   Although SR&ED claims have to be filed at a company’s tax year-end, you may still claim many costs associated with a project that hasn’t been completed. You don’t have to wait until the project has ended before you start claiming your tax credits.

5. You can’t claim SR&ED tax credits long after the fiscal year.

   SR&ED claims have to be filed with the CRA within 18 months after your fiscal year has ended. If your fiscal year ended December 31, 2021, your claim is due before June 30, 2023.

   Even if your record keeping hasn’t been top-notch, you can still recover research notes, meeting minutes, and emails. All of these are eligible SR&ED documentation. You may qualify for the incentive by only using your standard records.

6. As my competitor is working on a similar R&D project, my company is not eligible.

   You may still be eligible for the tax credit even though another company is also working on similar research and development. The other company’s work should however not be publicly accessible when you undertake your project.

   Only R&D work qualifies.

7. The SR&ED program’s definition of work that makes a company eligible for the incentive is very wide. If you undertake a project with technological uncertainty involved, you may well qualify. This may mean that you are developing new products, testing, or prototyping.

   Although you may feel that you’re not doing R&D per se, it could make you eligible for the program. That’s why it’s crucial to fully understand SR&ED eligibility.

   SR&ED does not apply to small companies.

8. The CRA doesn’t differentiate between large companies, small businesses, corporations, partnerships, sole proprietorships, or trusts when it comes to research and development tax incentives.

   Providing you spend money on eligible R&D, keep track of your research, and file the correct documentation, company size is not relevant.

9. SR&ED does not apply to startups.

   Even if your company has just started and you don’t have revenue yet, or if you have revenue but are not profitable, it is still possible to claim SR&ED expenses. SR&ED is a powerful opportunity for a startup company to thrive and grow without incurring substantial expenses.

10. I can only get a 35%investment tax credit.

    Although the federal government offers 35% investment tax credits to CCPCs for the first $3 million of eligible expenses, it is likely a company will also qualify for provincial investment tax credits. Although these vary in terms of whether they are refundable and rates, they can be substantial. This can lead to a combined refund rate of as much as 69% on salaries in some jurisdictions.

Conclusion
SR&ED myths commonly revolve around eligibility. There are many companies that don’t understand that they are missing excellent opportunities for saving costs. If you investigate the program’s requirements properly, you may be surprised to see how many activities and industries are covered.