Scientific Research and Experimental Development (SR&ED) program
The SR&ED Investment Tax Credit claim program has the following processing times based on the latest CRA standards:
Refundable Claims – 120 calendar days from receipt of a complete SR&ED claim and T2 Corporate Tax Return.
Non-Refundable Claims – 365 calendar days from receipt of a complete SR&ED claim and T2 Corporate Tax Return.
Client-Requested adjustments to refundable claims – 240 calendar days from receipt of a complete SR&ED claim and T2 Corporate Tax Return. Typically occurs when SR&ED claim is filed within 18 months of the year end after T2 Corporate Tax submission.
Client-Requested adjustments to non-refundable claims – 365 calendar days from receipt of a complete SR&ED claim and T2 Corporate Tax Return. Typically occurs when SR&ED claim is filed within 18 months of the year end after T2 Corporate Tax submission.
The CRA's SR&ED program aims to meet these processing standards at least 90% of the time. The CRA’s 2013 report to parliament shows that they achieved an average success rate of 96% on all claims for 2013.
Federal Budget Update
SR&ED Tax Incentive Program
The SR&ED tax incentive program is provided by the federal government to encourage and support SR&ED activities in Canada. The program provides attractive Investment Tax Credits (ITCs) on eligible expenditures and for Canadian-controlled private corporations (CCPCs), the credits can be refundable.
The Federal government has made changes intended to simplify the program, increase its effectiveness and allow for a government study of certain types of preparer fees charged.
In June 30, 2015, amendments were made to to the Income Tax Act (ITA) that impact the SR&ED Program. Effective for 2016 and subsequent tax years, taxpayers, including trusts, are permitted to claim investment tax credits (ITCs) in respect of certain expenditures. Inter vivos trusts are generally required to recognize ITCs in the trust. Testamentary trusts, on the other hand, can make ITCs available to their beneficiaries for use by the beneficiaries in computing their own income tax liability. The proposed measures would require that the ITCs of trusts created by will and flat top-rate estates be recognized in the trust or estate.
Some of the key changes to the program proposed in 2012 include:
Eliminating eligibility of capital expenditures – Under the existing program both current and capital costs are eligible for deductions and ITCs. However, determining whether a capital asset will qualify under the program can be complex. To streamline the credit base calculations, the government has made such capital expenditures (including expenditures for the right to use capital property) ineligible under the program for expenditures incurred in 2014 and subsequent years.
Decreasing the “proxy” overhead amount to 55% - Claimants are able to claim actual SR&ED overhead costs under the program. Many opted to claim 65% of SR&ED direct labour costs as a “proxy” calculation of their overheads. The government felt that the allowance may have exceeded the actual costs and therefore has reduced the rate by 10%. The 55% rate will be fully phased in as of January 1, 2014, with a transition proration mechanism that will allow a proxy rate of 65% for days in 2012, 60% for days in 2013 and 55% thereafter.
Allowing only 80% of contract payments for SR&ED – Effective January 1, 2013, only 80% of fees paid to arm’s length Canadian contractors to do SR&ED on behalf of a taxpayer can be included in this program. Consistent with the elimination of eligibility for capital expenditures, capital costs incurred by contractors to fulfill such contracts must also be excluded from the program. The government’s concern is that SR&ED ITCs should only be earned on underlying costs and not on any profit margin the contractor may charge for the work.
Decreasing the general base ITC rate to 15% - Currently ITCs are earned at 20% on the total qualified expenditures. Effective January 1, 2014 this rate will be reduced to 15%. For taxation years that straddle the calendar year, the base ITC rate will be apportioned according to days in the taxation year that fall in the 2013 or 2014 year.
CCPCs are eligible for an enhanced version of the program - This allows for refundable credits and a 35% ITC on expenditures within their $3 million annual expenditure limit. There is no change proposed to this enhanced CCPC rate.
Alberta SR&ED Update
The Alberta budget was released on April 22, 2008 – here’s an excerpt.
Alberta’s competitive business tax environment will be enhanced with a new provincial tax credit to encourage scientific research and experimental development (SR&ED). This refundable credit is worth 10% of eligible expenditures on research and development made after December 31, 2008 up to $4 million for a maximum annual credit of $400,000.
This measure will initially provide $60 million towards building knowledge-based industry, growing over time as businesses undertake more research and development. The Alberta SR&ED investment tax credit is refundable for all companies. This will be of special benefit to start-up and early stage companies, because they will still be able to receive the credit even though they may not be earning enough income to pay income taxes.
New Form T661 and Guide
The CRA released the 2010 version of Form T661 and T4088 (Guide to Form T661). Highlighted is IT 86-4R3 which refers to Technological Uncertainty or Obstacles which may occur because it is uncertain whether the goals can be achieved at all; or the taxpayer may be fairly confident that the goals can be achieved, but may be uncertain which path, route, approach, system architecture, integration method, algorithm etc. will work. Technological uncertainty must be distinguished from work that is routine in nature.
EFILE your SR&ED claim with your corporate tax return within 6 months of your tax year end and you could receive your refund within 2 weeks
Evaluate the project to make sure it meets SR&ED criteria and plan to make sure you maximize the claim