The SR&ED tax credit program reimburses eligible companies for a portion of their SR&ED expenditures. While we suggest that you speak with a qualified SR&ED consultant, outlined below are several factors that influence the amount you can recover with your SR&ED claim:
Your company structure
The SR&ED claim recovery rates vary depending on whether you are a sole proprietor, a partnership, a Canadian Controlled Private Corporation, a foreign-owned company, or a public company. Canadian Controlled Private Corporations always receive the maximum benefit.
The province that your development activities occurred in
The SR&ED program includes SR&ED claim incentives from both the federal and provincial governments, with the provinces having varying rates. Incentives are highest in Quebec and lowest in PEI as of September 2009, with Ontario falling in the lower-middle end of the spectrum.
The type of expenditures claimed
Recovery rates differ depending on the expenditure type, whether it be labour, materials, contractors, or capital. Labour expenditures always represent the highest SR&ED claim recovery rates, with materials, contractors, and capital generally representing roughly 60% of the labour recovery rate.
The method of claiming overhead
Businesses invariably have overhead expenditures, many of which are partially associated with the SR&ED activities. Management time, as well as electrical and water charges, are examples. A SR&ED claim can be filed using what is termed the traditional method (whereby overhead expenses explicitly associated with the SR&ED claim are claimed), or the proxy method (whereby a fixed percentage of SR&ED labour costs are utilized as a proxy for overheads). Unless the claimant has very high specific overhead costs that can be attributed to the SR&ED work done (and has the ability to accurately isolate those costs), the proxy method typically yields a higher claim return, and is easier to defend.
The financial performance of your company
The amount of recovery is further impacted by a number of financial metrics. If your organization’s profitability exceeds certain thresholds, if you have associated companies, or if you have high levels of taxable capital, your SR&ED claim recovery value can be impacted.
Clearly a number of factors impact your potential recovery. TSI’s expert consulting team can assist in providing a realistic estimate of your claim size based on these factors and a preliminary technical and financial evaluation.
Example
To provide a practical example, a Canadian Controlled Private Corporation operating in Ontario, with profits under $400K, taxable capital under $25M, no associated companies, and using the proxy method of overhead calculation, would be eligible to recover approximately:
73% of qualifying salaried labour expenditures
44% of qualified materials expenditures
44% of qualified contractor expenditures
These figures include the aggregate recovery of the federal SR&ED tax credit, the Ontario Innovation Tax Credit (OITC), and the Ontario Research & Development tax credit (ORDTC).
Using a simplified example, that means that a corporate investment of $100K for salaried labour performing eligible work (for activities such as design, testing, analysis, etc claimed at 73%) and $50K for qualified materials expenditures (for scrap or prototype creation, claimed at 44%) would result in a recovery of:
SR&ED labour credit: $73,000
SR&ED materials credit: $22,000
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Total SR&ED credit: $95,000
This means that for a total investment of $150K in labour and materials combined, your company could claim and recover up to $95,000. Clearly the financial benefits SR&ED claim are non-trivial!
Not all companies invest $150,000 -- some invest more and some invest less -- and the figures don't always align as nicely as they do with our example. There are also stipulations, exemptions, and complicated formulas.
Have a look at our SR&ED Claim FAQ page for more information, as well as our article regarding the The Top 5 Myths About The SR&ED Program.
Don’t let the complexity of filing a SR&ED claim stop you from recovering these funds. The experts at TSI take the complexity out of the equation.
