Business and Operations
Business Advisor: November 2011
By Christine Hykamp and Richard Weber
By Christine Hykamp and Richard Weber
Baking and technology that go hand in hand can save you dough on your tax bill.
An explosion in consumer desire for specialty offerings and healthier fare that doesn’t compromise flavour, texture, aroma or shelf–life is continuously challenging Canada’s baking industry. The industry is also faced with delivering these high-quality baked goods in an atmosphere of rising agricultural commodity and energy costs. The baking industry has been tackling this predicament head on through a broad push in technological advancements in equipment, formulation and processes, as well as new and improved ingredients, throughout the supply chain.
Canada Revenue Agency’s (CRA) Scientific Research and Experimental Development (SR&ED) program provides a valuable tax incentive to companies for eligible expenditures related to the pursuits of a technological advance. Advancements in your business operations that result in increased efficiency, reduced waste or new and improved products may be brought about by internal technological advancements and eligible for SR&ED tax credits. Often this program is underutilized by bakers because of the misconception that baked goods have nothing to do with technology. However, that’s not the case. SR&ED tax credits were successfully claimed by a small baked goods manufacturer for efforts to advance the technology of slicing biscotti containing large fruit, nut and chocolate particulates. A combination of formulation, baking and equipment tests were part of the eligible work to ultimately reduce the waste associated with a fractured biscotti and increase process efficiency. Although their efforts have resulted in some process improvement, their efforts continue to overcome the limitations of existing technology and so will their SR&ED claim. Another roadblock is gaining the knowledge of how to set up and conduct an eligible SR&ED project.
What is the value of SR&ED tax credits?
In very general terms, the federal SR&ED tax credit is 35 per cent of eligible SR&ED expenditures for qualifying small and medium-sized private Canadian companies. The credit may also be refundable. Refundable credits are either applied against taxes otherwise payable or refunded to the taxpayer when the credit is greater than the tax liability for the year. For larger companies, the federal SR&ED tax credit may be reduced to 20 per cent of eligible SR&ED expenditures and is non-refundable. Non-refundable credits are applied against taxes otherwise payable or they carry forward and can be applied against income taxes in future years (or also carried back) if the SR&ED tax credit is greater than the tax liability for the year.
Most provinces and territories have SR&ED tax credits as well. For example, in Ontario the SR&ED tax credit is generally 10 per cent of eligible SR&ED expenditures for qualifying companies and the credit is refundable.
Should I pursue an SR&ED tax claim?
To determine if an SR&ED claim makes sense for your business, you need to answer the following questions:
- Do you have eligible work?
If you are systematically conducting experiments, tests, trials and reformulations either in a lab, a test kitchen or on commercial equipment, in order to overcome technological obstacles that you, your suppliers, your customers and the industry at large cannot resolve, then you are likely performing SR&ED. Similarly, if the path to new and improved products or more efficient or environmentally friendly processes is not routine or straightforward, start the clock and keep track of related expenditures.
- Do you have eligible expenditures attributable to the technological advance?
All labour, materials consumed (or transformed) and contract costs for eligible services that are directly attributable to the SR&ED project can be claimed. Most claims take advantage of the proxy method in which 65 per cent of the claim labour costs are also added to compensate for overheads. A common disappointment with smaller companies can occur if the owner/operator contributes time to the SR&ED work but does not take a salary from the corporation. Labour costs need to be from T4’d employees or eligible contract expenditures.
You may have some capital expenditures in order to perform your SR&ED; however, these must be fully dedicated or greater than 50 per cent in use for SR&ED and you need to be able to prove there is no cross-utilization by your regular operations.
- Do you have acceptable documentation to substantiate your expenditures?
The CRA expects that you will have a time log or time sheets for each person on each of the projects claimed. Several manual and electronic solutions exist, so ask your advisor for any and all tools they may have. Materials consumed must be substantiated by invoices dated within the fiscal period of the claim. Contract expenditures must be from Canadian suppliers and supported by invoices detailing the eligible service and acknowledging that the SR&ED and intellectual property acquired from the work belongs to you. It is important to note that the contract expenditure is claimed in the fiscal year in which the service is delivered, not necessarily paid for. Capital purchases have several rules; the most important is that it must be new equipment.
The CRA also expects that you will have dated documentation and evidence generated during the project. Items such as project planning documents, designs of experiments, project records and notebooks, records of trial runs, minutes of meetings, test protocols, test data, and analysis of test results would be valuable. Evidence such as photographs, videos, samples, prototypes and scrap need to be dated and initialled at the time they are created. A full listing of acceptable supporting evidence can be found in the CRA’s T661 Guide to SR&ED.
Undertaking an SR&ED claim
It is highly recommended that if you wish to conduct and claim SR&ED you identify at least one technical resource and a costing resource and have them trained so that the SR&ED projects are proactively planned (where possible) and that expenditures are continuously tracked throughout the year. Organizing an SR&ED team and detailing the project status at regular intervals during the fiscal year will result in a solid, supportable claim generating a tax credit that you can perhaps roll right back in to making the next technological advance.
Business Improvement Group, Inc. has a team of technical people, including engineers and scientists familiar with your business pressures. Fuller Landau LLP has tax experts who understand the tax claim forms and the complicated tax rules. Our firms work closely together to ensure that you are gaining the maximum benefit. If you would like to learn more about SR&ED, contact Pam Chappell of Business Improvement Group at 1-877-541-5551 or Derek Wagar of Fuller Landau at 416-645-6500 to arrange a no-charge, onsite visit to confirm if your company may qualify for these credits.
Christine Hykamp, P. Eng., M.Sc. Eng., is the senior engineer, SR&ED Services at Business Improvement Group, Inc., and Richard Weber, CA, is a tax principal at Fuller Landau LLP.