In 2008, the federal and provincial governments of Canada paid out more than $4 billion to over 18,000 companies across the country through the Scientific Research & Experimental Development (SR&ED) program. Designed as an incentive for companies to invest in innovation and technological advancement, the program translates into a major competitive advantage for companies that file claims and receive cash refunds or tax credits, in return.
Although Canada’s SR&ED program has been recognized as one of the most generous worldwide, there are still many eligible companies who do not file claims. Often times, this stems simply from a lack of understanding of the program and the claim process, itself. In an effort to mitigate this problem, we’ve presented a case study of an actual client and their experiences in filing a SR&ED claim.
The Background:
SBLR was recently introduced to the owner of a mid-sized food processing company; we’ll call him Joe. Joe runs a successful business that manufactures a variety of breads and pastries which are then distributed throughout Ontario. The company stays competitive by constantly searching for innovative ways to increase shelf-life, enhance flavour and experiment with ingredients based on changing consumer preferences.
Joe had never taken the time to research his company’s potential eligibility for SR&ED tax credits until we brought the suggestion to his attention. We scheduled a complimentary consultation to meet with Joe, his controller Sarah and his production manager, Craig. During the meeting, we asked pointed questions to identify any potential SR&ED activities and to generate an overall estimate of expenditures. The company had three viable SR&ED projects during the previous one year period and we identified the filing deadline for the claims, which is eighteen months after the corporate fiscal year end.
Based on Joe’s interest in moving forward, SBLR prepared and submitted a proposal that laid out the responsibilities and commitments of both parties. The client commits to making appropriate staff members available on a timely basis and providing all accounting information that is needed to prepare the claims. SBLR commits to having qualified technical individuals gather the required information and prepare the technical report and tax returns. SBLR also commits to assisting the client if the claim is questioned or audited by the Canada Revenue Agency (CRA). Joe agreed to the terms and signed the proposal. Then it was time to get down to business!
The Process:
We set up a follow-up information gathering meeting with the production manager, Craig, to determine the full extent of SR&ED activities on a project-by-project basis. Based on Craig’s input, our technical advisor drafted a technical report over the next several weeks. The draft was submitted to Craig for review and corrections and was finalized shortly thereafter.
In the meantime we worked with Sarah, the controller, to extract financial information related to the projects discussed in the technical report. In this case, the costs extracted were the labour hours of the individuals involved, the materials used in the testing and subcontracted work.
Next, using the costing data for all three projects, SBLR conducted an analysis to determine if the client should use the proxy method of calculating overheads rather than the actual calculation of overheads. (CRA allows companies two methods of calculating overheads related to SR&ED submissions. one: a traditional method in which you must determine all actual overhead expenditures and calculate the percentage of these expenditures that apply to the SR&ED projects; or two: the proxy method – calculate the overheads using a prescribed rate of 65 percent of labour costs). In this case, we determined the client could increase the amount of eligible expenditures by using the proxy method, which in the end, would result in a larger claim.
Last but not least, SBLR prepared the corporate tax return for Joe’s corporation. Obviously, we highly recommend that strategic tax planning be done in advance to ensure the end result is in the best interest of the client – not only for the current year, but for future years as well. The tax return was submitted, along with the technical report, to the Canada Revenue Agency well in advance of the filing deadline.
The Audits:
With first time claimants, there is a higher likelihood of a financial and scientific audit by the CRA. Sure enough, the CRA contacted Joe three weeks after the claims were submitted, requesting a site visit for a scientific audit.
SBLR participated in the meeting with the scientific auditor, alongside Joe, the controller and the project manager. The auditor was given a site-tour of the premises and an overview of the three projects undertaken. The auditor asked several questions which were answered to his satisfaction and a week later, Joe was notified that the submissions were approved by the scientific auditor.
Several days after, a financial auditor from the CRA sent a list of queries related to the submissions. Sarah, the controller, gathered all the information requested, and, after review by SBLR, submitted it to the auditor. Within two weeks, the financial auditor approved the claims.
It is important to mention at this point that on an ongoing basis, for companies with a track record of filing SR&ED claims, they were often approved with little or no questioning at all from the CRA.
The Result:
Two weeks after the claims were approved by the financial auditor, Joe received a letter from the CRA stating that the claims had been accepted as submitted. A refund cheque for just over $150,000 was received in the mail, shortly thereafter. And so, Joe’s commitment to innovation and the time and effort he invested to prepare and file a SR&ED claim was rewarded in kind. He used his cash refund to reinvest in the business and plans to file again next year.
To be certain, applying for the SR&ED tax credit is a complex matter and you are strongly encouraged to seek expert advice. SBLR LLP Chartered Accountants can help you determine if your activities qualify for the SR&ED incentive program and we can assist you in making the actual claim. We can advise you about the suitability of your existing accounting systems for capturing the necessary project information and we can participate in the review of your SR&ED claim by the Canada Revenue Agency.
So, what are you waiting for?
