SR&ED Case Study: Reward Offered for Innovation
15 Nov 2017
In 2016, the federal and provincial governments of Canada paid out more than $4 billion to over 18,000 companies across Canada through the Scientific Research & Experimental Development (SR&ED) program. Designed as an incentive for companies to invest in innovation and technological advancement, the program can be a major competitive advantage for companies that file claims and receive cash refunds.
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. Oftentimes, this stems simply from a lack of understanding of the claim process, itself. In an effort to mitigate this problem, we've presented a series of blogs about an actual client situation and their experiences in filing a SR&ED claim.
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 bread and pastries which are 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 3 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 submitted a proposal that laid out the responsibilities and commitments of both parties. Joe commits to making appropriate staff members available on a timely basis and providing all the 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 Canadian Revenue Agency (CRA). Joe agreed to the terms and signed the proposal. Now it was time to get down to business!
Continuing the process we set up an 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, which was then submitted to Craig for review and finalization.
In the meantime, the SBLR accounting team 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:
- 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
- proxy method - calculate the overheads using a prescribed rate of 55% of labour costs.
In this case, we determined that 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 the strategic tax planning be done in advance to ensure that 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 company's corporate tax filing deadline.
Joe's audits process will be explained on the next blog.