Does your business invest in research and development? You could be eligible for a significant tax credit if you operate in Canada.
Through the Scientific Research and Experimental Development (SR&ED) program, more than 20,000 Canadian businesses earn over $3 billion in tax credits each year.
Perhaps you’re a fledgling business that hasn’t had many tax seasons. Maybe you’re a longstanding business that hasn’t yet claimed an SR&ED tax credit. It could be that your business has just started investing in research and development and is looking to claim its first SR&ED tax credit.
Whatever the case, it’s essential that you take the proper steps to claim your SR&ED tax credit. Here are six tips to keep in mind throughout the next fiscal year.
1. Determine If You’ll Be Eligible
The reality is that much work goes into claiming an SR&ED tax credit.
Before you go above and beyond to track specific numbers and keep detailed logs, you’ll first want to determine whether or not you’ll be eligible to claim a tax credit. You’ll also want to determine the approximate amount of credit your business is looking at.
First, it’s important to note that not all research and development is eligible for the SR&ED program. A project must qualify as technological advancement, uncertainty, or technical content.
According to the Canada Revenue Agency’s (CRA) Eligibility of Work for SR&ED Investment Tax Credits Policy, five questions are asked to determine whether a business will receive a credit. Be sure to review them thoroughly as you plan.
2. Log Everything and Keep Your Books Organized
If you want the most straightforward path towards getting the SR&ED tax credit your business deserves and the fewest headaches in the case of a future audit, it’s good practice to log all of the details about your SR&ED-eligible projects.
You’ll need to be diligent about tracking hours, personnel, roles, tasks completed, and expenses. As a result, your books will be accurate and thorough and require very little guesswork come tax time.
What’s more, items such as notes, meeting minutes, and photos might prove to be helpful down the road.
Also, discuss with your bookkeeper(s) how you can best keep SR&ED projects separate from your business’s other projects so that the information is easy to locate and review as needed.
3. Review With Your Team Each Quarter
A year is a long time. Even the most detailed-oriented employees may sometimes be tempted to cut corners or leave out critical information at different points throughout the year.
For this reason, it’s a good idea to check in with your team each quarter to review your logs, catch and correct any errors, and determine whether or not the process is working. You may also find that you need to start tracking other metrics or that it’s unnecessary to continue tracking certain ones.
If your business is working with an SR&ED consultant, have them present to ensure that everything is running smoothly and that you’re still on pace to receive your SR&ED tax credit. This is also an excellent time to go over your erc tax credit. Every quarter, use the time you're spending with your team to review their time with you, helping to kill two birds with one stone.
4. Make Sure You’re Prepared for an Audit
Continue to track your SR&ED-eligible projects year-round, make sure your files are easy to locate and review, and train personnel on navigating those files in the case of an audit.
If you’re a small business, you might be audited as often as every few years, as the CRA dedicates the bulk of its business tax compliance resources to small-to-medium businesses (SMEs). Being well-prepared will go a long way towards keeping the audit process as simple and painless as possible.
5. Find Out If You Are Also Eligible for Other Programs
In addition to the SR&ED program, all sorts of research and development (R&D) funding programs are offered to Canadian businesses. Some are government programs, while others are private.
Because you’re making such a concerted effort to track your SR&ED projects, consider whether you might also be eligible for some of these programs. This will help you maximize the return on all of your hard work.
6. Claim Your SR&ED During Tax Season
Finally, it’s time to claim your SR&ED tax credit. As you’ve worked hard to determine your eligibility and track all relevant projects, your business can reap the reward of its many efforts throughout the past fiscal year.
As tax season approaches, speak to your tax consultant or SR&ED consultant to ensure that your business claims the maximum SR&ED credit you’re eligible for and any other relevant tax credits.
