What Companies Get SR&ED Tax Credit Claims Wrong

Mistakes and lack of planning cost businesses hundreds of millions of dollars a year.

The Canadian government’s Scientific Research and Experimental Design (SR&ED) program was created to support and reward business investment in innovation. Yet many companies are not using the program to its full potential and as a result are missing out on all that SR&ED has to offer.

For CFOs, CEOs and Founders, every dollar counts.

The SR&ED program has provided billions of dollars a year in tax credits to Canadian businesses since 2016, and more than 20,000 companies file claims each year. Typically, technology, hardware, telecommunications, manufacturing, energy, or biomedical companies can easily identify investments that qualify for SR&ED. This is because these companies invest in experimental work where they regularly try to create something new or improve something substantially. But any company can be eligible if it invests in the right areas.

Is your business eligible?

For work to be considered innovative research and development, there must be elements of creating something new, potential risk of failure, and challenges to overcome. A summary of the Canadian Revenue Association (CRA) SR&ED Guidelines states that qualifying work must:

Advanced technology: work performed in the experimental development activity should generate information that advances your understanding of the underlying technologies and deepens technical knowledge.

Include technological uncertainty: they are technological problems or unknowns that cannot be overcome by applying techniques, procedures and data generally available to competent professionals in the field.

Have technological content: the project must have been carried out in an iterative, systematic and documented process.

The “Why” requirement: the work must be carried out for the advancement of scientific knowledge or for the purpose of achieving technological progress. The key to both is the generation or discovery of knowledge that advances the understanding of science or technology. Note that success or failure in achieving your goals is irrelevant to assessing whether your work meets the “why” requirement.

The “How” requirement: the work must be a systematic investigation or research carried out in a field of science or technology by means of experiments or analyzes (listed at the beginning of the definition).

RELATED: How to Better Leverage SR&ED Reimbursements to Accelerate Startup Growth

For CFOs, CEOs and Founders, every dollar counts. In fact, recovering money from SR&ED can have a very big impact on growing revenue faster, creating better differentiation from competitors, or providing an additional financial cushion for bad times or risks that don’t pay off.

Top 6 SR&ED Mistakes Companies Make

  1. Incorrectly self-identified SR&ED projects
  2. Some companies want to “tinker” with SR&ED. While this is possible, it can be like trying to do your own legal work. If you don’t have a finance and tax background, and if you don’t have access to payroll, accounting, and project tracking information, you might want to rethink your SR&ED approach. Mistakes can leave money on the table or trigger a government audit.

    Additionally, most accountants who offer SR&ED services do not have the in-house technical knowledge to properly identify qualifying work. To overcome this, these accountants ask their clients to identify what work they think qualifies for SR&ED, and they ask the clients to write a “draft” technical report that they will “modify with their ideas.”

    Whatever the scenario, the client ends up having to identify and frame eligible technical work, which in almost all cases leads to a claim that is not maximized, weakly defensible and very likely to be rejected by the customer. ‘ARC in case of review.

  3. Do not claim because it may be too difficult
  4. Some CEOs have tried to claim SR&ED and said “never again” because the process can be arduous. But avoiding a claim could mean leaving money – potentially even hundreds of thousands of dollars – unclaimed.

    The “never again” feeling often stems from working with an SR&ED vendor who talks about a great game, but just doesn’t know what they’re doing. Because of this, they push the work back onto the client and find excuses as to why this is a normal process. If you work with a quality SR&ED supplier, they should take on the heavy lifting.

    Ultimately, if you think SR&ED is too hard to claim, then you’re using the wrong approach to claim. SR&ED claims can be a smooth process. If your experience isn’t smooth and simple, find another SR&ED provider that knows what they’re doing.

  5. Do not claim because “my projects are not eligible”
  6. Many companies disqualify themselves because they think they are not doing the right kind of work. Remember that the definition of SR&ED program research and development is to advance the state of your technology through a systematic approach while overcoming technical challenges.

    The SR&ED program considers information readily available in the public domain (search engines, white papers, software patterns, etc.) as well as the context of your business. If you can’t find a solution to your technical problem in the public domain, that’s where your work may qualify for SR&ED.

    In fact, some technology challenges stem from constraints faced by your specific situation due to legacy support issues or legacy equipment in use. Overcoming these types of technical challenges in a systematic way could make the work eligible for SR&ED tax credits.

  7. Not thinking strategically about SR&ED and planning throughout the year
  8. SR&ED should not be an end-of-year project. The ability to maximize claims is directly related to your ability to accurately identify eligible projects and associated expenses.

    Use the right tracking tools, such as GitHub or Jira for software innovation, to keep a continuous record of eligible projects throughout the year. This eliminates the all-too-common need to gather everyone in a meeting and go over projects, costs, and results on a project-by-project basis at the start of the year.

  9. Treat SR&ED as an accounting or tax compliance requirement
  10. Instead, consider SR&ED for what it really is, an efficient way to fund more innovation, growth and differentiation. This involves your development and manufacturing groups, your research department, your testing groups, management, in-country contractors, and finance and taxation.

    SR&ED is submitted through your tax return. But that does not make it a fiscal year to prepare the application. In fact, it’s the exact opposite. The preparation of SR&ED claims is an engineering and technical undertaking which is subject to tax, do not in the other direction.

    If your company’s financial executives own the SR&ED process, reconsider that ownership. Your company’s technical managers should be responsible for preparing the SR&ED claim, and your financial managers should be responsible for submitting the claim. Without this differentiation, SR&ED will continually be seen as a tax requirement and not a strategic tool to help grow and maximize product development.

  11. Do not use SR&ED as a form of non-dilutive financing
  12. Every business operator, investor, or board member regularly thinks about a company’s financial strategies. Having capital is essential to meet the needs of the business, and any form of financing or cash acceleration is always considered. SR&ED is an optimal way to recover dollars invested in R&D which can then be used to accelerate additional investments or, if your SR&ED tax credit is a tax refund, improve your cash flow situation.

    “Before our IPO in 2020, our work leveraging SR&ED laid the foundation for Plurilock to successfully file three patents, increasing our competitive moat, which would have been very difficult without [SR&ED] fund,” said Ian L. Paterson, CEO of Plurilock. “SR&ED has helped us minimize dilution and has been a key part of our funding strategy.

Planning SR&ED with your teams throughout the year reinforces a positive culture of innovation and enables teams to track and report on the right things throughout the year.

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