Overview
Imagine a government program that rewards your company’s innovation not just with recognition, but with a substantial financial benefit. Welcome to the world of the Scientific Research and Experimental Development (SRED) program. This initiative, tailor-made by the Canadian government, provides a lucrative opportunity for privately-owned Canadian software and IT consulting businesses to capitalize on their R&D efforts.
SRED is Canada’s Research and development (R&D) tax credit program, but do not let the moniker of a tax credit deceive you. SR&ED tax credits are REFUNDABLE, meaning that SR&ED money comes directly to the business as a cheque or direct deposit. SR&ED is NOT simply a way to offset taxes payable.
Unfortunately, despite the significant benefits on offer, many software and IT consultants are yet to stake their claim. Whether it’s due to lack of awareness about the program, misconceptions about eligibility, or being engulfed in the hustle of everyday operations, these businesses are missing out on what can be best described as “free government money”.
In this guide, we will dismantle these barriers, bust the myths, and illuminate the path to claiming your rightful SRED credits. Let’s embark on this journey and unearth the treasure that the SRED program holds for your consulting business. Buckle up and prepare to transform your innovative efforts into tangible rewards.
Let’s break down each of these barriers and explain why it would be a mistake for software consultants not to investigate the SRED program.
How SR&ED Works
R&D tax credits in Canada are administered by the Canada Revenue Agency (CRA) through the Scientific Research and Experiment Development (SRED) program. SRED is administered in arrears and acts as a rebate for Canadian businesses.
Prior to submitting a SRED application, a business must incur expenses through the undertaking of research or experimental development work in Canada. These expenses can be payroll, scrap or prototype materials costs, and subcontractor costs.
For software/IT consultants, materials costs will likely be non-existent. Cloud computing/AWS charges, software charges/license fees etc. are not claimable expenses, therefore software consultants would look to payroll and subcontractor expenses for SR&ED claiming purposes.
For payroll expenses claimed for SRED, it is critical that the employee be both a tax resident of Canada and physically located in Canada.
For subcontract expenses claimed for SRED, the subcontractor needs to have a BN/HST/SIN number and all the subcontract work that you claim for SRED must have been done in Canada. Therefore, if a subcontractor is a Canadian company but employs overseas workers, for SRED you can only claim the percentage of work that was completed in Canada.
It is after the conclusion of the business’s fiscal year businesses can apply for SRED money to offset the costs that the business incurred while doing qualifying SR&ED work (more on that below). The government will payout 70% of payroll costs that the business incurred while doing qualifying SRED work, as well as 30% of subcontract and materials costs incurred by the business while doing qualifying SRED work. This SR&ED Calculator allows you to input costs and view the resulting expected SRED refund.
Qualifying SRED Work
A concise, perfectly, precise definition of what work qualifies for SRED does not exist. The CRA has a multiple-page interpretation of the income tax act definition of SRED which is often further parsed down by individuals within the CRA.
For the purposes of this overview, we will simplify the definition of SR&ED qualifying work as the following:
For a project to qualify as SRED-eligible, you must have faced the risk that you could not complete it satisfactorily due to technological obstacles or unknowns. There are secondary requirements. Your efforts should be a systematic investigation. You have some record of your work. But striving to resolve a technological uncertainty is the main point.
For software consultants specifically, many are under the impression that if they are getting paid by a client for work, that they can not claim it for SR&ED. This is not black and white and there are some grey areas regarding ownership of IP but here is a general rule of thumb:
- If a client is claiming SRED themselves for your work, you will not be able to claim SRED yourself as a software/IT consultant as well.
- If a project was completed for a company that is not claiming SRED for your work, you can claim that work yourself. (No foreign clients can claim SRED at all so you can almost always claim SRED for this work)
Time Investment and How to Apply
Applying for SRED does not need to be a burden for your Software/IT consulting company. SR&ED Consulting companies such as G6 Consulting can offload all the headache. SR&ED Consultants will prepare your claim, complete all the paperwork, submit your claim, and handle all post-submission administrative duties until your claim is approved, paid, and finalized. They also tend to work on contingency and only get paid after your claim is fully approved and paid out to you.
Of course, in order to determine the amount of time you spent on SR&ED eligible work, you will need to track your time. In part 2 of this blog we will discuss how System X can seamlessly help you do time tracking for both customer billing and SR&ED purposes goes into this topic in detail.
Conclusion
As we’ve explored, the SR&ED program presents a golden opportunity for software and IT consulting businesses in Canada. By dispelling misconceptions and understanding the program’s workings, you can unlock a wealth of funding and ensure your innovative work doesn’t go unrewarded. Yet, handling the intricacies of the SR&ED process might seem daunting. This is where our next discussion comes into play. Stay tuned for our follow-up article, where we’ll delve into how SystemX, your all-in-one business management platform, can seamlessly assist you in meeting SR&ED requirements, making the process easier and more efficient than ever before. Your journey towards harnessing the full potential of SR&ED funding is just beginning.
