How New Budgets are Affecting Your SR&ED Credits
Canada, Saskatchewan, and British Columbia have all mentioned the Scientific Research and Experimental Development (SR&ED) tax credits in their new budgets. So how do these affect your Western Canadian business?
The Canadian SR&ED program is indirect funding for research that contributes to the Canadian scientific knowledge base. Other programs, like the Industrial Research Assistance Program (IRAP), provide direct funding for specific, pre-approved project costs. SR&ED does not require pre-approval, only evidence that the work occurred and that tangible learnings arose from it. It enables companies to initiate research on the fly, as needs arise, rather than halting work to seek funding.
First the Good News
In British Columbia, the provincial SR&ED program was due to end in September 2017. The province has extended their 10% refundable tax credit by 5 years, to Sept 2022. Of course, the costs eligible for the 10% refund are the BC portion of the eligible Canadian costs.
In Saskatchewan, the government had scaled back their SR&ED program in 2015, reducing the rate from 15% to 10% and making the credits non-refundable. This month’s new budget undid some of those changes: while the rate remains at 10%, the credits are once again refundable.
While these provincial budgets did seem to extend the program, they still depend entirely on CRA first approving the expenses. In that lies the rub: in the last 2-3 years it has become increasingly difficult to qualify for the federal program. CRA treats the program as a compliance activity, not a tax credit. They have significantly increased the number of reviews (audits), and have committed to meeting with every new claimant.
In their most recent report to Commons, CRA reported that they had not quite achieved their 75% reclamation goal, having reclaimed only 73%. This statement is very telling of CRA’s attitude toward SR&ED: they have set internal standards to reject 75% of all SR&ED claims they receive. The tax act and published policies have not changed, but the program is declining rapidly due to how difficult it has become to qualify. Analysts then report misinformation about why this is occurring, blaming the declines on disinterested businesses instead of reduced access to the funds.
Unfortunately, the Canadian government did not take this opportunity to acknowledge or respond to numerous industry calls for change. Instead, they maintained the status quo with a promise to review the program over the coming year. Talk of shifting the program out of the Ministry of Finance into Innovation or developing an external body of experts for technical evaluations have come to naught. For the coming year, we foresee little real change in the program. On average, Saskatchewan businesses who pay no provincial tax may see some benefit, but the other Western provinces will not. We will continue to have frequent, extensive reviews, especially with first-time claimants.
Based on the effort involved to prepare it, the probability of a review, and the turnaround time, it is difficult to see value in amending a tax filing to add the SR&ED. Advance-Tek practitioners are seeing better results when the original filing includes the SR&ED, however, not all accountants understand the implications of doing it later as an amendment. As a result, some are actually advising their clients to take this approach, creating significant additional work for all parties involved.
In the next 12 months, we expect little to change but do hope to gain a better understanding of the government’s concept of innovative “clusters” and how it is likely to affect research tax credits. In the comments below, please share any tips you have for ensuring a positive experience for first-time claimants.
Written by Stacey in Project Management