Even some of our clients who have been working with us for years have questions occasionally about the SR&ED program. Here are some of the more common questions that we get asked.

What should every small and medium enterprise (SME) CEO know about the SR&ED program?

The SR&ED tax credit program provides companies with a significant competitive advantage in the global marketplace, encouraging companies to continually develop new technologies, improve existing technologies and/or develop new products in Canada.

Global competition is forcing Canadian businesses to constantly innovate and stay ahead of their competition. SME’s do more innovation and technological advancement than a lot of larger companies, out of survival. Being innovative and staying ahead of the curve allows SME’s to grow and maintain their competitive edge.

The Canadian government recognizes the benefits to the overall economy by encouraging Canadian businesses to invest more resources into R&D. As such, the SRE&D tax credit program is among the most generous R&D incentives in the world.

How much money is on the table each year?

According to the Canadian Government, the SR&ED tax credit program provides over $3 billion to more than 18,000 claimants every year (approximately 75% of claimants are SME businesses) and believe it or not, 50% of SR&ED eligible companies in Canada are not claiming.

It is important for entrepreneurs to know that Canadian companies can receive between 20% and 50% of their qualified R&D expenses in tax credits or cash refund. When a business makes a decision to invest in innovation and technological advancement, business owners need to have a certain level of comfort that they will be able to recover their initial investment as quickly as possible. Receiving SR&ED refunds helps them realize a positive return on investment and is a huge addition to cash flow.

Companies are at a significant competitive disadvantage right at the outset if they invest in new technologies but do not take advantage of SR&ED tax credit program. SR&ED refunds are often reinvested to hire more technical staff and to develop new and innovative products, in order to maintain a competitive advantage. Without this program, it is safe to say that a lot of companies would think twice about making large investments for future growth.

What are the biggest mistakes SMEs make when applying for a claim?

In many instances the SME’s don’t realize the value of the work they perform in terms of technological advancement and product development and they end up not claiming projects that may be eligible.

Take the typical SME situation where, on the one side, you have the business owner who wants to see the full benefits of the SR&ED program. Then you have the other side, where you have certain employees (engineer, controller, etc.) that are already extremely busy doing multiple functions, now having to spend a lot of time documenting and tracking all the R&D projects and also preparing the SR&ED claim. Under these circumstances, it is possible that projects get missed and/or SR&ED claims do not get properly prepared – in both cases, the company would be leaving money on the table. The conflict here is the fact that the person who is doing all the work, does not see the benefit the same way the business owner does.

How much time, money and effort should an SME expect to invest in its SR&ED claims?

That is a difficult question to answer because it really depends on how much the company focuses on innovation and how it sees the benefits of the SR&ED program. But the simple answer is this: what you put in to it is what you get out of it. End of the day, companies save a significant amount of time and improve their chances of receiving SR&ED refunds that they are qualified for, if claim activities can be monitored and tracked actively rather than a passive end of year exercise.

"Before working with Northbridge Consultants for our 2008 claim, we had not fully understood how we could qualify for the SR&ED program, or to how it could benefit us; the Northbridge team made us aware of how much value we could create by utilizing the program. We were able to better weather the recent economic recession with the money that we received for our 2008 and 2009 claims, and were able to take on more challenging jobs that we would not have done before claiming under the SR&ED program.”

Michael Finch, President of Task Custom Metal Fabricators

In early May, the Canada Revenue Agency (CRA) issued the revised T661 form for fiscal year 2011 (T661-11). With this round, the changeover period is notably short – the usage of the form will become mandatory as of August 1st, 2011.

The significant change on this form is the introduction of a new 'Part 6' section that is to be completed by the claimant. Within this section there is a summary table of information for all projects to be claimed that is to be completed. The other change with this form is that the transitional measure where the CRA has been allowing claimants to submit Part 2 – Project information for only the 20 largest projects in dollar value has been extended indefinitely.

For each project, the required information includes:

1. Project title or identification code
2. Salary or wages in the tax year
3. Cost of materials in the tax year
4. Contract expenditures for the SR&ED project

Supplementing the release of the updated T661-11 form, was an updated “Guide to Form T661” as well as a new version of the Application Policy on Filing Requirements.

As the CRA is completing its policy review project, it is evident that there is an increasing emphasis being placed on the availability of detailed contemporaneous documentation to support claimed amount and activities. These growing expectations for increased documentation are being placed on all potential costs whether salary, capital, lease, subcontract, etc.

While the CRA reviewers are still authorized at present to allow for some degree of substantiation that is built on inference within contemporaneous documentation, there has been a distinct shift towards (and sometimes insistence for) contemporaneous evidence supporting the ‘direct engagement’ of employees within SR&ED projects, as well as any working papers that show how the claim was assembled.

The best policy continues to be to remove the discretionary component of the review process as much as possible through the development and use of a tracking system that produces contemoraneous documentation. Your NorthBridge team is experienced with the development of SR&ED project tracking system development that, through customization to your specific company, will deliver a strong base of supporting evidence while minimizing overhead for you to administer. Please speak with your NorthBridge account manager to learn more about how tracking systems can support your SR&ED claim.

June 30 December 2009 FYE claims due now
July 31 January 2010 FYE claims due now
August 31 February 2010 FYE claims due now