How to benefit SR&ED as a foreign company?

The SR & ED tax credit program was created for Canadians who innovate in Canada, but what about foreign companies that do research and development on Canadian soil?

They can enjoy it too.

SR & ED is one of the best innovation tax credit programs in the world. Canada and Quebec both support research activities by foreign companies.

“The R & D tax credit is one of the most generous support for innovation in the world. Foreign companies have access”

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A foreign company can benefit from the SR & ED tax credit in two ways: if it claims through a Canadian subsidiary or into a Canadian-controlled private corporation (CCPC) that it does not does not have control of.

Canadian subsidiary

If it files through a Canadian subsidiary, the corporation must perform all SR & ED activities in Canada and pay Canadian taxable employees and suppliers. In this context, she is claiming a 20% non-refundable tax credit on her Canadian federal income tax and is eligible for the 15% refundable additional credits in Quebec.

CCPC – Canadian-controlled private corporation

Using a CCPC is one of the best ways to qualify for SR & ED credits. The minority interest of a foreign investor in a CCPC may allow him to claim up to 35% of the first $ 3 million of eligible expenses, plus additional refundable credits of up to 30% in Quebec.

Canadians Abroad

Canadian companies doing R & D abroad can still apply for SR & ED in Canada. Claimants who perform the SR & ED must be Canadian residents. A maximum of 10% of the wages and salaries of the SR & ED claim may come from eligible activities outside Canada.

To learn more about foreign companies and SR & ED, visit Invest in Canada.

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Expand your business with SR&ED

SR&ED partnership locally and internationally

The SR&ED tax credit is excellent for financing the development of your technology. If you plan it well, you can also use this tax credit to accelerate your business development.

In a previous article, we illustrated how this credit can be maximized to benefit both parties.

Let’s look at other simplified situations where SR&ED credit is used to develop business.

« These R&D tax credit strategies require a long-term vision of your technology and a tight planning of each of the companies »

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IMPORTANT NOTE: We limit our discussion by avoiding important but very technical details. If you intend to use one of these channels, do not do it alone, consult your preparer, or better yet, call us. We have already implemented them successfully elsewhere.

Characteristics of SR&ED

Let us first recall some important features of the SR&ED tax credit program:

• The SR&ED tax credit is available to those who take the technological risk, unless they transfer this right through an R & D contract to another entity. The credit is therefore not automatically assigned to the payee.
• SR&ED does not exclude collaboration between companies to develop technology.
• The provincial base rate is more generous in Quebec than elsewhere in Canada. It is therefore beneficial to develop and claim SR&ED credit for activities in Quebec.
• The provincial credit in Quebec is always refundable (check).

Let’s look at how best to use these features to maximize your advantage.

1- Develop a R & D partnership

Two companies can claim the same project. Each will claim its own activities according to their technological stakes which may be different for each of the partners. These will be presented separately in the claim of each of the companies.

It is essential to define at the outset the relationships between the companies that collaborate here and who share the risk on the same project. This partnership may include two or more companies. A university partner may also be included.

If the partnership agreement is signed before the start of the project, it is possible to qualify this project for the “Tax Credit for Private Partnership Pre-Competitive Research” and to widen the eligible cost base for the Quebec SR&ED refundable tax credits program.

Example:

A customer develops a technology to save fuel. He needs to put this technology to the test in a real environment outside his laboratory. He has a partnership agreement with a customer that operates a fleet of trucks. Both submit a SR&ED claim. The first for developing and tuning of its energy saver and the second for the development and tuning of technologies and processes required to install and optimize the use of this economizer depending on the engine it is installed on.

2- Develop a technology for a company outside Canada

If you experimentally develop technology for a company outside of Canada, you can claim the entire SR&ED project under your control, even if the other company pays you to do this R & D. Here are two situations that capitalize on this idea:

Example of the European customer:

A Québec company is mandated to develop and tune a highly innovative technology. The client company is in Spain. The contract stipulates that R & D will be carried out on behalf of the Spanish client who will pay for this research.

Example of the head office abroad:

A Québec company, subsidiary of a foreign company, receives the mandate of the head office (say in California) to carry out research on behalf of the parent company, which will pay all the costs of this research on a “cost plus” basis.

Conclusion:

To conclude, these strategies require a long-term vision of your technology and of the evolution of your expertise. They are only possible within a tight planning that takes into account the economic, legal, tax and eligibility dimensions of the SR&ED activities of each of the companies involved. You can not and should not do this without consulting experts.

These strategies allow you to share the benefits of the SR&ED tax credit and use them as a business development tool to:

• Obtain financing to develop your technological advantage in the years to come.
• Change your vision of your technologies, markets and partners.
• Open the doors to new customers for whom this advantage will be a generator of strategic agreement.

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Sharing the SR & ED benefit

Expand your business with SR & ED (1)

Are you developing technology? Use SR & ED credit as a tool for business development. It is a radical thought, I agree, but, you will see, it works, if you change your point of view.

Traditional vision

The SR & ED tax credit is a great tool to fund your technology development. It helps you to advance your technology, develop your platform or generalize the application of your technologies to other fields. This, of course, is the generalized view. It is used everywhere and it is always adequate.

« Look at the SR & ED tax credit as a source of development …. of your business »

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On the other hand more and more companies are encountering difficulties with their claim. Many look to their R & D at the end of the year as a “retrofit” funding mechanism in the SR & ED program. This is one of the important causes of difficulties encountered by claimants: they have never thought or seen their development as a systematic process of technological transformation. And now they are claiming their projects as such. No wonder the CRA sometimes encounters difficulties in believing them …

R & D to develop your business

My point here is this: There is a tax credit program that is still generous enough to open up very interesting opportunities for all those who are developing technology.

The CRA now requires that the projects sought be seen and managed from the start as systematic experimental development project, so let’s go one step further. If we have the expertise to develop advanced technologies:

• Let’s use the features of this program to identify business opportunities.
• Maximize this credit by defining, from the outset:
• the best legal structure
• the top organizational model,
• the optimal positioning of the project

In summary let’s develop another way to use this credit to your advantage and to that of our business partners. Just keep your eyes and mind open.

Let’s look at simplified situations illustrating our purpose:

IMPORTANT NOTE: We limit our discussion by avoiding important but very technical details regarding eligibility. Once opportunities are identified, qualifying the projects remains. If you intend to use one of these strategies, do not do it alone, consult your preparer, or better yet, call us.

Characteristics of SR & ED

Let us first recall some important features of SR & ED credit:

• Generally, the SR & ED tax credit is available to those who take the technological risk, unless they transfer this right through an R & D contract to another entity.
• In the contract (or proposal) if you are paid to do R & D, you surrender the right to claim SR & ED. If you want to retain this right, write your contract to deliver a good, a product or a service. Your client does not have control over the SR & ED done, but he acquires the right to exploit the results.
• The highest credit is on salaries. In Quebec, for example, the combined (federal + provincial) credit rate for salaries is almost double that of subcontractors. It is therefore very advantageous to claim salaries rather than subcontractor invoices.

In summary, we are asking for credit where the salaries paid to develop this technology are the highest and we write our contracts to facilitate our claims. Let’s now look at how best to use these features.

Share the best credit

Do you have a technology development team? Why not offer your potential customers to reduce their invoice by sharing the credit for a given project. A discussion can also determine:

• Who has the most advantage in claiming SR & ED credit?
• How to define contracts in order to maximize these benefits.
• How to share the results.

Example:

A customer built his proposal by offering his client a rebate (from the tax credit) if he agrees to be the first to use the new technology. The credit is claimed by the developer because he is the one who pays the wages and gets the maximum credits. Ultimately, the customer gets cutting-edge technology at a reasonable price, which compensates him for the small drawbacks that this immature technology will have for him – and he will benefit from the improvements that will come in the next set-ups.

Conclusion:

SR & ED credits finance your technology development, but it is also a very powerful tool to support your business development and your technological vision. It is a matter of point of view.

It takes a good deal of vision, creativity and planning. But it is very possible. The key is to plan the credit rather than try to recover it at the end of the year.

In upcoming articles we explore alternative ways to use SR & ED credit to grow your business development.

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Where do we find SR & ED in IT?

Finding SR & ED in IT. It is becoming increasingly difficult to define SR & ED activities because of the evolving requirements imposed by the CRA. But before putting any effort into producing a document, documenting and making a claim, you need to know how to identify areas where there is good potential to claim SR & ED credits.

In this category of articles (Identification) we explore various ways to find SR & ED “nuggets” to explore. We also look at some examples of projects in different fields of technology. Today we study the field of computer science. If you are in the chemical, mechanical, manufacturing or other sectors you should take a look … if you change a few words this applies to you too also.

« When claiming R&D tax credits, forget about functionalities, focus on the technology and ways to go beyond its limits »

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Software development is certainly one of the most popular technology sectors in the SR & ED projects claimed. According to recent CRA statistics, more than one-third of claims come from computer development in various forms (software, gaming, multimedia, internet, etc.).

What limits identifying SR & ED projects?

The main obstacle to identifying potentially eligible projects is … the computer scientist himself. Indeed, most experienced developers tend to see their job as a full-time problem solver with the consequence that they see no limits to what they can develop – there is almost no insoluble projects provided they are allowed enough time to solve the situation, of course. This view is too general. We must focus on more specific and more demanding challenges.

A second obstacle to identifying SR & ED projects is that they all use roughly the same development tools, which themselves vary with time and patterns. How does our project in Java differ from the neighbor’s project in Java? Here the focus is not put in the right place. Regardless of the tools, this is what you do with it and how you develop it that really matter. Look at the limitations of your tools. Have you tried to overcome, to go beyond them?

At the other extreme, non-computer scientists see software development as a variant of magic and mistakenly believe that any computer development should be claimed, especially if it is expensive. In reality it is necessary to look for the portion of the project where the computer scientist meets a technological challenge. It is therefore a subset of the project that can be claimed. And the best positioned to define these subprojects are the IT professionals themselves, not the promoters nor the accountants.

The expert should describe the technological challenges. And the best way to identify SR & ED eligible projects is to change the perspective. Instead of seeing an application project to manage customer data, rather looks at the development and integration of technologies into a platform that synchronizes several tools, several components and in a very unique and original way.

Examples in computer science

Let us now look at some examples from computer projects: There is often a potentially eligible SR & ED project when developing a technology that offers:

• A solution or a kernel to connect heterogeneous (varied) components;
• A new architecture on at least one of its technological dimensions. Especially if we have not found any equivalent capable of linking these components while satisfying several constraints;
• An integration of several technologies that have never been done according to our research. Or that integrate one or many MORE, (more speed, more integrity, more efficiency, etc.);
• A unique technological component (specifying how technologically unique it is);
• A generalized solution for several tools or technological platforms not compatible with each other. This is called a generic solution;
• Work on the design and development of a platform that solves several technological problems;
• A technology bridge between very incompatible remote generation technologies (eg, connecting an AS-400 to the web or interfacing a COBOL application with cellular applications);
• Systematic research of solutions to solve problems of performance, data integrity, stability of platforms, etc. ;
• A solution that even your supplier(s) advised you against, or recommended not to do because “it’s impossible”;
• A solution that meets several incompatible criteria, constraints or standards (eg performance and integrity of the results, etc.);
• A revolutionary concept for synchronizing, integrating, sequencing or maximizing technologies.

Conclusion

In conclusion, there is no secret, forget the features and focus on the technology and on ways to go beyond its limits.

Do you have any tricks to better identify potential SR & ED projects in computer science or elsewhere?

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Where do we find SR & ED activities?

This is one of the most common questions we are asked. The easy answer is: wherever we systematically develop technology. But this is not a very satisfactory answer. It’s too general. So today we will identify indicators, we will look at examples of projects or activities offering potential eligibility for SR & ED.

The SR & ED program is often perceived as very complex, with rules, exceptions, caveats and all those little things that make the claiming process rather intimidating or discouraging. This perception is partially true, there are in fact several forms and circulars. This does not mean that it is impossible to find projects to qualify. Let’s look at where we can find R & D activities.

In which domain ?

There is potentially R & D in all sectors where you have to develop or modify technology. So we can say that there is R & D in areas such as:

« There are R & D tax credit activities in all sectors of activity where you have to push on the limits of the technology »

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• Industrial, civil and process engineering (chemical, electrical, mechanical, robotics etc.),
• Computers (software, games, electronics, networks and telecom, etc.),
• Environment (treatment or measurement of water, soil, air, etc.),
• Medical apparatus and equipment (electronic or otherwise),
• Biotechnology (biology, pharmaceutical, etc.),
• Food (conservation constraints, taste, reduced salt and sugar, etc.),
• Energy and mining, and even the
• Non-traditional sectors for R & D (construction, film making, etc.).

Obviously, some areas are traditionally more fertile in R & D activities. Computers are now particularly pervasive. But there is very often a technology to create, evolve or develop, except for these domains :

• cultural (though some shows are pushing hard on the technology),
• sales (wholesale and retail), and
• several tertiary sector activities.

Revolutionary innovations?

Contrary to some beliefs, it is not necessary to revolutionize worldwide technology to find eligible activities. Of course, it is a helping factor if we are pioneers of our technology. But we can also claim more modest developments, a well-structured and rather incremental research project.

Too small projects?

The question is whether there are enough costs to make a claim. In fact, the project size is often proportional to the company. For an SME, an expenditure of over $ 60,000 can be huge. A credit refund of $ 40,000 can make the difference between a deficit or profitable year. On the other end, we have seen large companies rejecting to claim for projects under $ 200,000 expenditure (!? …). There is no fixed rule. Each case must be considered on it’s own merit and in it’s context.

Experimental work indicators

Here are some clues. An indicator draws our attention, it leads us to further our investigation. There is a potential for SR & ED activities when you see a technology development where there is:

• The development of new technologies (products or processes),
• A unique combination of technologies,
• Modifications to enhance the performance of existing products or processes,
• Significant cost or deadlines overruns for technical reasons,
• Inadequate current knowledge, there is a need to experiment,
• The project is stopped or redefined for technological considerations,
• The design of technical components is redefined during the project,
• A company has a research laboratory in-house,
• A company holds or applies for patents on this project,
• A need to acquire, change or develop new equipment,
• Significant spending on computer without being in the computer business,
• A company develops a technology in an emerging sector,
• A company in “start-up”,
• Starting a plant using new technologies,
• The development of numerous prototypes,
• An alliance with another company for:
  • access to new technologies;
  • sharing the costs of R & D;
• Unmatched innovation in technology, or even in the industry.

If the hat fits you … document!

The CRA now requires an experimental process documented during the year. There is no room to negotiate on it. So if you believe that your project may qualify, begin to document now your processes, your goals, your hypothesis, your results, your timesheets and conclusions. It’s always a good reflex to keep track of this, and if you end up claiming these activities, you’ll be glad to have had this genius idea.

In conclusion: ask an expert

In conclusion, here we have presented various indicators of potentially eligible activities for SR & ED. The CRA distinguishes between SR & ED (Scientific Research and Experimental Development – a term defined in the Canadian tax law), and R & D, the common term (research and development). Non-program experts can hardly differentiate between the two types of activities. It is therefore essential to take immediate step to confirm the eligibility from the beginning of the year or at the start of the project. You have two choices: to ask to the CRA, if you dare, or ask an expert consultant who will confirm.

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SR & ED credits for you

Is this your story?

Joe is constantly confronted with technical problems, customer requirements, too tight deadlines or incompatible technologies. He sees nothing else. It has to work at any cost.

All entrepreneurs live the same kind of situation one day or another. They are very concerned about the survival of their business, they are totally dedicated to the delivery of their solutions and to the satisfaction of their clients. But several of them completely forget important opportunities to support their growth. One has to simply take a good look at it.

The opportunity

Canada is one of the most generous countries to support innovative companies. The tax credit program for Scientific Research and Experimental Development (SR & ED) is claimed annually by more than 25,000 companies for more than $ 3 billion of loans.

« In Quebec, you can claim (in cash) R&D tax credits up to 73% of the salaries of developpers involved in eligible work »

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Accessible to everyone

You can finance the development of your technology in Canada regardless of the area in which you operate: the web, telecom, IT, health sciences or manufacturing.

Is it for me?

Look at your big technological projects underway or recently delivered. All projects can not qualify, of course. But if you answer yes to three questions, then you need to think more seriously there:

1- Delivering this project he forced you to make technological innovations?

2- Did you face technical risks associated with this project?

3- This project he has you progress in your understanding of the technological components? Would you do this project in the same way, now that you know the limitations of these technologies?

Advantages

Why not take a look? Take time it is worth to be interested. Here are some very good reasons:

– You can claim up to 73% of salaries of employees involved in work to solve these technological problems. The credits for R & D (SR & ED for insiders) are a form of very attractive financing.

– Many of your competitors are already using. This is an important advantage they do not boast but a direct impact on profitability. Why not for you?

– $ 1,000 tax credit can not be compared to sales of $ 1,000, but to a net profit after tax of $ 1,000

– It is a source of direct financing of the development of your technology.

o Some thus finance a portion of their next delivery technology.

o Others see the credit as a direct payment of salaries of technicians.

– This credit is available each year. It is therefore possible to plan your tax credits to finance your major developments

– This is a business development tool. You can use this credit to share the risk associated with some of your technology projects between you, your customers and the government.

« $1 in R&D tax credit can not be compared to sales of $1, but with net profit after tax of $1 »

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How do we do it ?

To claim tax credits SR & ED you must produce a short technical report for each eligible project and calculate the costs related to these projects. You must also meet the technical and accounting support documentation for each project.

1- Start now

First, do not be too long ! The credit can be claimed for the current fiscal year and the previous one, if it ended there less than eighteen (18) months.

2- Identify your technology projects

Then, make a first list of recent and ongoing projects for which:

– Technology has presented one or challenges,

– You had to take your concept more than once,

– You have reached the limits of available technology

– You attempted to overcome these limitations (you can claim even if you have not managed to push the boundaries), and

– You learned what to do – and not do – with this technology.

3- Document

Then, you begin to gather your evidence and documents to support your answers:

– Project Plans,

– Email,

– Letters,

– Timesheets,

– Contracts,

– Reports,

– Plans and test results,

– Registers

– Wiki.

4- Get help

Finally, the SR & ED program is a bit complex for a beginner. Consult with experts in this type of case. This saves a lot of time! They know how to distinguish what can be claimed and how to develop to maximize opportunities to obtain this credit. They are often paid a percentage. It is their way of sharing the risk of the file with you.

Find a good counselor in R & D:

– Includes your technology,

– To experience this kind of specialized file

– With that advance your understanding of the program.

Conclusion

In conclusion, the SR & DE tax credits program is for you if you develop technology and meet challenges in doing so. In the coming weeks we will provide ideas and examples for identifying SR & ED activities in your development projects.

What do you think of the program? Do you see an opportunity for your company? Have you taken advantage of this tax credit?

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