Introduction

In our previous blog post, we introduced the Scientific Research and Experimental Development (SR&ED) tax credit program and its benefits for software/IT consulting companies.

One critical aspect we didn't delve into was the importance of time tracking for SR&ED claims.

Since SR&ED compensates your business based on the costs incurred during eligible work, including payroll, you need a reliable way to track time spent on SR&ED-qualifying projects for each employee. Although many businesses submit SR&ED claims using estimates without proper time tracking, it's not advisable.

Though it may not seem necessary to have detailed time tracking initially, as evidence isn't submitted with your SR&ED claim, it becomes crucial if your claim is selected for review. In fact, time tracking is the first thing that the Canada Revenue Agency (CRA) will request when conducting a full SR&ED review.

To emphasize the importance of time tracking, here's a direct quote from a CRA SR&ED reviewer:

“Employees’ time (when and if applicable) should be substantiated with supporting evidence. The evidence should detail what activity each employee did for SR&ED and the number of hours spent on each activity. Timesheets that simply indicate “SR&ED work” or provide a similar description are not sufficient to support the work claimed… CRA recommends claims be supported by time logs detailing, on a regular basis, what activities were carried out by employees directly engaged in SR&ED. The hours need to be broken down by SR&ED activity within each project. Please ensure that SR&ED hours are segregated from non-SR&ED work carried out for each company project.”

This is where System X shines. Our comprehensive solution allows you to effortlessly track time spent on projects for all your employees, automating and strengthening your SR&ED claims.

Detailed Features of SystemX for SRED Qualification

Digital Timesheets: SystemX offers digital timesheets to accurately record and track your project hours. This feature provides the substantiation needed for your experimental development work claim.

Effortless Expense Tracking: SystemX simplifies SR&ED claims with its expense tracking feature, accurately documenting project-related costs such as materials, equipment, and subcontractor expense

Superior Documentation and Record Keeping: SystemX helps you maintain accurate and detailed records, a critical part of SRED qualification. Never lose track of important documents again.

Advanced Project Management: SystemX's project management features facilitate the demonstration of systematic investigation, a key requirement for SRED qualification.

To end things off

For more information on the SR&ED tax credit program, SR&ED Consulting companies like G6 Consulting can eliminate the hassle. 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, meaning they only get paid after your claim is fully approved and paid out to you.

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.