SBLR Chartered Accountants

Learn from the mistakes of those who have gone before!

Today’s marketplace can be fiercely competitive and if you’re not grabbing every advantage for your business, you’re leaving yourself at risk of being chewed up and spit out by the competition. Having an extra windfall of cash to reinvest back in the business may be enough, however, to tip the scales in your favour. But where, you might ask, does this elusive ‘extra cash’ come from?

One source is the extremely generous Scientific Research & Experimental Development (SR&ED) program offered by the government of Canada. The SR&ED tax credit program is Canada’s largest, yet most underutilized tax incentive, designed to encourage businesses in all industries to invest in innovation, experimentation and technological advancement. In fact, many businesses engage in qualifying SR&ED activities without even realizing it – and therein lies the danger.

If your competitors are receiving large cash refunds for SR&ED activities and you aren’t, chances are you’ll be left behind in their dust. So, it’s time to take a hard look at the activities in your business to identify potentially qualifying SR&ED projects, or reinvestigate your existing claim to identify if anything has been left on the table.

Take a moment to consider your own state of affairs. Have you created a new product or improved an existing one? Have you improved a process or created a new process to reduce costs or improve workflow? Have you developed some form of custom equipment or machinery? Have you designed or developed new software or prototype equipment? Have you tried to do any of the above but failed in the attempt?

If you answered ‘yes’ to any of the above, you may be eligible to receive a hefty cash refund from the government.

As SR&ED specialists, we have worked with a wide variety of businesses to navigate through the SR&ED claim process. We hope you can learn from the experiences of those who have gone before you…

Case Study #1: The Past Can Come Back to Haunt You!

Background Information: Our first example is a mid-size food processing company that engaged our firm to perform their year-end accounting and asked us to assist them in filing a SR&ED claim. In the past, they had filed claims with an outside consultant who prepared the technical report and their previous accountant prepared their corporate tax returns.

Issue: As we began to work on the 2009 fiscal year end, we uncovered a very serious problem. The taxable income from the previous year was in excess of $400,000 (the Small Business Deduction limit) which meant that instead of receiving a SR&ED tax credit based on 35% of qualifying expenditures, the company was now only eligible for a 20% tax credit. This costly oversight (resulting in the SR&ED claim being cut by almost 45%) was a result of poor communication between the independent SR&ED technical consultant and the company’s previous accountants.

Solution: We assessed the situation and came up with an extremely creative tax planning solution to ensure that the company was able to receive the full 35% tax credit. We reviewed the prior year’s filing (prepared by the previous accountant) and discovered that the consultant’s fees for the SR&ED work had not been recorded as an expense. In order to reduce the taxable income to below the $400,000 Small Business Deduction threshold, we amended the previous year’s corporate returns to include the expense incurred for the consultant’s fees. This brought the taxable income below the threshold, enabling the company to receive the enhanced 35% tax credit in an additional $95,000 cash refund.

Lesson: It is extremely important when filing for SR&ED tax credits that the technical consultant stays in frequent contact with the accountant. The potential for costly errors is greatly minimized if both functions are handled by the same team.

Case Study #2: What A Difference A Year Makes!

Background Information: The second example is a mid-size technology company that designs customized software solutions for the travel industry. The company was displeased with their previous SR&ED consultant and took advantage of our offer for a complimentary initial consultation. We met with the owners at their facility to discuss the situation and were engaged to prepare the SR&ED claim on their behalf.

Issue: After three consecutive years of an unsatisfactory working relationship with their previous SR&ED consultant, the final insult occurred when the claim was audited by the government and the SR&ED consultant provided very little assistance during the process. Due to this lack of guidance, the company’s SR&ED claim was cut in half and their diminished refund was not paid out for almost 12 months. This was a fast-growing business that required the extra cash flow for reinvesting in the business. They had expected to receive a sizeable cash refund and the reduced claim hit them quite hard.

Solution: During our initial consultation with the client, we created an action plan for the current year SR&ED submission. The company had a September year end and the plan was to provide a SR&ED claim (tax return and technical report) within the six-month filing deadline of the corporation – March 31st. Our meeting with the client took place at the end of February; therefore, there was a very tight timeline to complete and submit all required information for the claim, including all the labour time spent on the project as well as the capital equipment required to produce the prototype machinery for the company. By the last week of March, the corporate tax return with the SR&ED information was completed along with the technical report and was submitted to the government in advance of the six-month corporate filing deadline. The great news for the client was that in three weeks, the CRA had completed their review and issued a notice of assessment for the current year’s claim. The client received $260,000 from the government by the end of April.

Lessons: Firstly, it is absolutely critical that your SR&ED consultant be fully involved and prepared to support your SR&ED claim should it be audited by the government. This will greatly increase the chance of your claim being accepted, as is. Second, in order for your claim to be fast-tracked, it is important to submit the technical SR&ED report along with your corporate tax return. This reduces the CRA processing time to a maximum of 120 days (as opposed to a much lengthier process if the claim is submitted separately from the corporate year end).

Case Study #3: What You Don’t Know CAN Hurt You!

Background Information: We were recently referred to a mid-size manufacturing company that designs and builds custom motors for clients worldwide. We had a meeting with the owners to discuss the potential of filing a SR&ED claim, which is something their existing accountants had neglected to explore with them.

Issue: Our initial consultation uncovered the fact that the company had indeed been engaged in SR&ED activities for many years, based on special requests from their customers to modify the motors in order to accommodate the extreme temperatures of local climates. Upon closer examination, we identified that the company had been involved in SR&ED related projects for more than six years. Unfortunately, the government restricts retroactive claims to a maximum of two years.

Solution: We worked with the client to gather all the labour, material usage and subcontractor time that was required in order to test, modify and test again the specifications requested by customers throughout the previous two years. Because at no time was there certainty that these specifications could in fact be achieved, these projects were considered eligible for the SR&ED program. In this case, where the client did not even realize they were doing work that qualified for the SR&ED tax credit, with our help they were able to carve out a sizeable claim amounting to $230,000.

Lesson: It doesn’t hurt to investigate! If you are not sure but suspect that you may in fact be engaged in SR&ED qualifying activities, seek professional assistance. An hour of your time invested up front can save you the heartache of an unrealized cash refund. Ask the right questions now to ensure that you receive the cash refunds to which you are entitled.

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? Don’t let the competition get away with your piece of the pie!