When are administrative expenses eligible in SR&ED?

When do some expenses other than those associated with scientific research or experimental development projects could be eligible for the SR&ED tax credit?

The Canada Revenue Agency (CRA) issued the Policy on Overhead and Other SR&ED Expenditures. It explains the rules regarding the deductibility of administrative salaries or wages in the context of SR&ED activities.

Overall, administrative expenses :

• Must be “directly related” to the exercise of SR&ED, and
• They would not have been incurred if the SR&ED activities had not been carried out (additional cost).

The phrase “directly related” here is important; the work performed by a particular employee or division must be linked to one of the following three elements, and must be done without any intermediary or step that intervenes between the employee / division and,

• SR&ED work; or
• SR&ED staff; or
• Equipment used by staff to perform SR&ED.

In many cases, to properly determine whether an expense is directly related, an analysis of the tasks performed is required to ensure that a direct, unmediated link is present with the SR&ED work. Here are two partial lists of examples of tasks considered directly or indirectly related to SR&ED – based on the “SR&ED Overhead and Other Expenditures Policy”:

Directly related to SR&ED work  (claimable)

• Salary or salary of administrative or clerical personnel providing services to SR&ED staff.
• SR&ED financing (is “directly related” if the funds are used to carry out SR&ED activities).
• Assessment, recruitment and hiring of SR&ED personnel.
• Implementation of the technical and control of scientific projects, definition of future SR&ED projects, supervision of the SR&ED group, selection / evaluation of SR&ED projects.
• Evaluating the technical feasibility of a product and the potential SR&ED efforts and costs involved.
• Technological planning of ongoing SR&ED projects (assignment of technological personnel, priority of work, development of technological strategies, quality of materials to be used).
• The work of clerical support staff for tasks directly related to SR&ED payroll, procurement and accounting.

Indirectly related to SR&ED work (not claimable)

• Costs related to the management of the business (not related to SR&ED)
• Costs related to bids.
• Purchases (other than direct purchases of SR&ED materials / equipment).
• Taxation and legal services.
• Sales, marketing and advertising.
• Employee relations.
• Development of benefit programs for SR&ED employees.
• Corporate secretariat and report to shareholders.
• Initiation and closure of licensing agreements.
• Feasibility studies (non-technological) that lead to potential SR&ED collaborations and assess the commercial feasibility of a given technology.
• Commercialization of existing intellectual property.
• Review and approval of SR&ED budgets.
• Applications for patents.

At the federal level, these expenses are included in the proxy. In Quebec, it is possible to claim a credit on these expenses if the traditional method is chosen.

Important note: the information contained in this blog is for information only. Before evaluating or submitting a claim, you must consult an accounting or tax specialist and the relevant policies available on the Canada Revenue Agency (CRA) website.

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How much money do you leave on the table?

The SR & ED tax credit is the highest paying tax program in Canada. It offers refundable credits (so always checks) for SMEs. It is a particularly interesting program to claim wages, because in Quebec you can get up to 73.75% in government reimbursements. Let’s see what it is:

Note : credit rates discussed on this page are a combination of provincial and federal credits for activities in Quebec. 

“In Quebec, you can get up to 73.75% in government refunds“

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Small and medium-sized enterprises (SMEs)

Canadian-controlled SMEs are defined as having less than $ 50 million of taxable assets and less than $ 500,000 of taxable net income in the previous year.

All their credits are refundable (two checks).

Usually SMEs that do a lot of SR & ED do not have taxable income and that is why they receive 2 checks.

But the client will not receive a check or a partial amount if he has tax to pay. The government refunds the tax before and issues the check for the difference

The first $ 50,000 of eligible SR & ED expenditures

This gives entitlement (Table 1) to refundable credits of 54.25% on salaries, 28% on unrelated subcontractors and 35% for materials consumed in SR & ED.

Table 1 – SME – Combined Credits Rates Federal and Provincial (in Qc)

The excess of this $ 50,000 eligible expenditure for SR & ED

This gives entitlement (Table 2) to refundable credits of 73.75% on wages, 37.75% on unrelated subcontractors and 35% for materials consumed in SR & ED.

Table 2 – SME Excess – combined credit rate Federal and Provincial (in Qc)

All credit rates discussed on this page are a combination of provincial and federal credits for activities in Quebec.

Large companies (GE)

Other companies are either large companies or foreign-controlled companies. THE QUARTER ABOUT THESE CREDITS IS REFUNDABLE (Quebec portion):

The first $ 225,000 of eligible SR & ED expenditures

This gives entitlement (Table 3) to credits of 23.25% on wages, 12% on non-related subcontractors and 15% for materials consumed in SR & ED.

Table 3 – GE – Combined Credits Rates Federal and Provincial (in QC)

The excess of this $ 225,000 eligible expenditure for SR & ED

This gives entitlement (Table 4) to credits of 35.15% on wages, 17.95% on non-related subcontractors and 15% for materials consumed in SR & ED.

Table 4 – Excess GE – Combined Credits Rates Federal and Provincial (in QC)

Your competitors are probably already claiming these credits. How much longer are you going to leave so much money on the table?

Important note: the information contained in this blog is for information only. Before evaluating or submitting a claim, you must consult an accounting or tax specialist and the relevant policies available on the Canada Revenue Agency (CRA) website.

We are honored by your visit to our blog. R & D Action thanks you for that.

Look at the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

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Do you claim all R&D tax credits you are entitled to ?

How much tax credits for SR & ED (SME) ?

Calculating the SR & ED tax credit for an SME

The R & D tax credit is the largest and most lucrative tax credit program for the development of technology in Canada. Accounting and tax credit calculations are relatively complex processes. Therefore we present a case study as an example of some of the variables to be taken into account.

This page excludes eligibility and documentation issues. Here we focus solely on tax credit calculations for a small or medium-sized enterprise (SME) with salary-type and subcontractor-type expenditures. Please note that tax credit rates, exclusion levels and refunds are different for larger companies.

1-Initial facts

John Smith performed SR & ED eligible work for 50% of his time during the year. His assistant was 100% SR & ED. They both worked in Quebec. John’s annual salary for this company was $ 100,000, his assistant has received $ 70,000. John hired a Quebec subcontractor for his SR & ED activities. The subcontractor billed $ 40,000 for SR & ED. The steps for calculating credits are as follows:

2-Calculations

Important Notice: These calculations are for presentation purposes only. Before evaluating or submitting a claim you should contact a tax specialist, such as R&D Action, to validate the calculations in your specific situation. We also suggest you consult the relevant policies available on the Canada Revenue Agency (CRA) website.

All the work is done in Quebec:

Provincial Credit:

Step 1 – Salary base (SR & ED part of salary): ($ 100,000 x 50%) + $ 70,000 = $ 120,000

Step 2 – Subcontractor (Provincial) : 50% of invoices are claimable: $ 40,000 x 50% = $ 20,000

Step 3 – Total SR & ED Expenditures (Provincial): $ 120,000 + 20,000 = $ 140,000

Step 4 – Deduct the Quebec Exclusion Level on SR & ED Expenditures: $ 140,000 – $ 50,000 = $ 90,000

Step 5 – Quebec Total refundable tax credits for SR & ED: $ 90,000 x 30% = $ 27,000

Federal credit:

Step 6 – Salary base (SR & ED part of salary): ($ 100,000 x 50%) + $ 70,000 = $ 120,000

Step 7 – Subcontractor (Federal): 80% of invoices are due: $ 40,000 x 80% = $ 32,000

Step 8 – Prescribed Replacement Amount – 55% of SR & ED Salary: $ 120,000 x 55% = $ 66,000

Step 9 – Total SR & ED Expenditures (Federal): $ 120,000 + $ 32,000 + $ 66,000 = $ 218,000

Step 10 – Less note [1]: Provincial SR & ED tax credit of the year: $ 218,000 – $ 27,000 = $ 191,000

Step 11 – Total Federal SR & ED Refundable Tax Credits: $ 191,000 x 35% = $ 66,850

Total refundable credit :

Step 12 – Total SR & ED Investment Tax Credit (ITC): $ 27,000 + $ 66,850 = $ 93,850

Net charge for this SME:

Actual SR & ED Expenditures = $ 50,000 + $ 70,000 + $ 40,000 = $ 160,000

Net Expenditure after ITC: $ 160,000 – $ 93,850 = $ 66,150 (41.34% of actual R & D expenditures)

Thus, in this example, the after-credit charge represents 41.34% of the total actual SR & ED expenditures.

The net effect of Quebec’s $ 50,000 exclusion level on SR & ED expenditures is felt more deeply by small claimants. For example, the credit on $ 10,000 of wages is worth:

• 54.25% (10,000 x 1.55 + 35% = $ 5,425) to the first $ 50,000, and
• 73.75% ((10,000 x 1.55 – (10,000 x 30%)) x 35%) + 3,000) = $ 7,375) for amounts that exceed the threshold of $ 50,000.

So at a rate of 54.25%, it is worth claiming. But credit is much more interesting (73.75%) when you spend more than the exclusion level.

3-How to maximize the amount of my credit?

The tax credit rates for SMEs are fixed (Fed: 35%, Que: 30%), so is the replacement amount (55%).  The research time and salary are the factors to plan and optimize in order to maximize the tax credit.

In conclusion in this context, you may need to revise the traditional tax planning strategies you did put in place. This is where SR & ED experts from R&D Action can help. Our specialists provide the tax planning assessments and strategies that professionals and other organizations conducting SR & ED projects need to optimize their claims and avoid revisions that delay their return.

We are honored by your visit to our blog. R&D Action thanks you for that.

On the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

Did you like your reading? Tell us so. Share it. What should be added? What topics are you interested in?

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[1] The provincial credit must be removed from the calculation before calculating the federal ITC. Since the provincial credit is considered government assistance, the federal government will not allocate ITCs for SR & ED on this amount.