Step-by-Step: How Do I Get SR&ED Cash for My Tech Spend?
1.How much can I get?
The amount of money your startup or company gets for technical spend varies based on what kind of organization you spend the money through. The CRA provides one level of SR&ED refund to Canadian-controlled Private Corporations (CCPCs), and a lower level to other private corporations, individuals (proprietorships) and trusts. Sorry partnerships, but you are specifically excluded from eligibility for SR&ED.
Federal SR&ED can refund up to 35% of a CPC’s qualifying spend. The refund to the CCPC is called an Investment Tax Credit (ITC). We’re only looking at federal Canadian SR&ED in this guide, but most Canadian provinces have their own SR&ED schemes. We can advise you on what’s best in a free consult once we know where you are in Canada.
Are you something other than a CCPC? All non-CCPC applications for SR&ED get ITC at 15% - only for qualifying SR&ED spend of course. Even more importantly the ITC can only be used to reduce your tax bill. You can’t get money back if you’re not a CPCC and are losing money. This includes individuals, trusts and the other entity types we laid out above.
As mentioned above, partnerships can’t claim SR&ED even if the activity would otherwise be eligible because a partnership is not legally considered a taxpayer. The ITC for a partnership is given to the individual members (individuals, corporations, or trusts).
2. How do I go about claiming SR&ED?
First, make sure what your startup or company is doing qualifies, in the CRA’s definition of research and development. Reach out to us for a free consult or check out the other sections of the guide if you’re not sure yet.
Then make sure you have all of your documentation together. Your claim will take a while for the CRA to process so please make sure it’s correct going in. F6S can help you understand what kind of documentation you’ll need.
Next, find all of the expenditures you can claim to get money back for your SR&ED activity. There is some complexity in this, but in general you may be able to get money back for these SR&ED related costs incurred within Canada:
- Wages and salaries
- Spend for materials used exclusively for scientific research and experimental development
- Contractors you hire for scientific research and development
- Overhead related to SR&ED
- Some spend involving third-parties
- Lease spend for SR&ED
- Capital spend
You can start preparing your claim when you have all of the above information on what you’ve spent correctly categorized and supported.
You’re now ready to start preparing the SR&ED program technical description of your research and development, financials, calculate your SR&ED eligible expenditures and other information for your projects. The SR&ED program rules require you to submit the SR&ED Expenditures Claims form (form T661), which outlines your SR&ED expenditure and technical description of your research and development. This is submitted along with the income tax return for your startup or company through form T2SCH3. If you’re an individual it’s through form T2038(IND).
There’s nothing more frustrating to us than finding a startup founder or company that has SR&ED eligible spend outside their claim period - meaning they lose the ability to get money back. Corporations can claim expenses made within eighteen months of the end of the tax year in which you spent the money. Individuals can claim within seventeen and a half months of the end of the relevant tax year.
You should be ready to submit (and may be asked to submit) additional support in addition to the T661, T2SCH3 and/or T2038(IND) forms. Some financial and technical documents you may be required to have at hand are:
- Proof of payment
- Project planning documentation
- Design documents
- Project management records
- Photo or video recordings
- Time sheets
- Payroll Records
- Document related to any trials
- Scrap records
- Project status reports
- Documentation related to source code and/or system architecture for software projects
The CRA generally takes five weeks to process and verify your claims after submission, but processing times can be much longer. As we’ve mentioned, the CRA may ask you for more information or send you questions for multiple reasons, including missing documentation or inadequate responses to justify your claim. We can assist our clients to get the CRA what it needs to continue towards approval. Even better, we want to work to avoid these issues entirely by helping you make a strong submission in the first place.
3. How does the CRA review my SR&ED claim?
The CRA will review your claim for compliance with all of the rules around the SR&ED program. It is also likely to conduct checks to make sure the costs you are claiming are legitimate. If satisfied, the CRA will approve your claim and either issue a payment (if you’re loss making) or a credit against your taxes (if profitable). The CRA can also decide that it wants to question the information you’ve provided, that your claim is incomplete, or that it just wants to spend more time reading your technical description and other aspects.
When this happens, your claim is forwarded to the CTSO. The CTSO’s technical and financial specialists will then go through your claim to run the numbers or investigate whether your research and development activities are inline with the SR&ED guidelines. We mentioned that it’s important to be 100% sure you’ve described how your project(s) complies with the CRA’s definition of eligible activities - this is where that work pays off again. The same is true for making sure you’ve claimed as much as you can, but no more. The financial reviewer will be determining if the expenses you’ve claimed are allowable as per the SR&ED guidelines.
You’ll get a Notice of Assessment at the end of any review with a decision. Your claim may be either invalidated or approved at that point. If the claim is invalidated you have 90 days from the date on the Notice of Assessment to file an objection and argue why you feel your SR&ED is valid.
We make sure for our clients that processing times are as short as possible and that your claim moves smoothly by getting your initial submission right. The right time to make sure you answer the 5 Q’s of SR&ED correctly, claim all of your eligible expenditures and provide correct support is before you submit, rather than after your claim has been sent to the CRA.
Ask for help in our SR&ED Discussion Group