Norm Copley was confident he could boost his firm’s sales by hiring a chemist to improve its line of janitorial supplies and automotive cleaning products. But the company couldn’t afford it. Copley, president of Ancaster, Ont.-based Leysons Chemical Products, had another option: to apply for tax credits under the Scientific Research and Experimental Development (SR&ED) program. Yet a bad experience with a different federal program made him hesitate. “It took forever to complete, and it backfired,” he says. “I’ve been leery of government programs ever since.”
But a friend who had found the SR&ED process painless convinced Copley to take a chance on it. The program, administered by the Canada Revenue Agency (CRA), grants tax credits to businesses for developing new products or techniques, or improving existing ones. Working with a consultant, Copley landed a $50,000 credit — one also approved in each of the three years since then. The chemist he hired has developed a biodegradable industrial cleaner and several eco-friendly products that Copley says have improved Leysons’ reputation and increased its sales by 5%.
In 2007, the CRA approved $2 billion worth of SR&ED credits. More than 15,000 firms got refunds, most often for $50,000 to $70,000. Yet many CEOs are as wary of the program as Copley used to be. They don’t even apply for the credits, leaving what SR&ED consultants estimate is up to $1.5 billion on the table. But their reticence is largely founded on misconceptions. Here are the five most common, and why they shouldn’t dissuade you from applying for help to which your firm is entitled.
ONLY HIGH-TECH PRODUCTS QUALIFY
Ottawa is looking for R&D projects designed to create new, improved or technologically advanced products — or the processes to make them. But you don’t have to be a tech company to get a refund.
Read: The Credit You Deserve about how Canada’s Fastest-Growing Companies tap Ottawa’s R&D tax-credit program for millions of dollars each year
“I have clients who develop sausages, and they get the tax credit,” says Julie Bond, president of Bond Consulting Group Inc., a Toronto-based SR&ED consultancy. The key, she says, is that the research and development “has to involve something you don’t know, something you’d like to do better or work you’ve already done.”
IT’S ONLY FOR BRAINPOWER
You can claim the credits even if you don’t have any scientists on your payroll, says James Perly, president of James Perly Consulting Inc., a Toronto-based specialist in government programs for business. The CRA will credit you for any workers involved in your R&D project, even if they don’t wear white lab coats — and even if your company is losing money and therefore not paying income taxes.
You can also claim expenses such as materials, contractors and equipment leases. But Perly says salary expenditures typically yield 80% of the total refund, because the credits are far more generous for that expense category. If, for instance, your firm’s taxable income is up to $400,000, you’ll get 68.5% of your claimed salary expenditures back, versus 41.5% for contracting expenses and 22.6% for capital equipment used solely for R&D. “People often think using contractors is cheaper tax-wise,” says Perly. “But in reality, you can claim a lot more with employees.”
IT’S MORE TROUBLE THAN IT’S WORTH
Many companies don’t submit a claim because they figure they can’t spare the time to do so. But Ottawa has just simplified the process. (See “News Briefs” on page 9.) And an SR&ED consultant can take care of the grunt work for you, typically in return for 20% of the refund.
“If your recovery is less than $60,000, you don’t need a consultant,” says Bruce Braithwaite, president of Toronto-based SR&ED specialist Braithwaite Technology Consultants Inc. “But it’s certainly worth making a claim.” He says you shouldn’t bother only if your claim is worth less than $10,000.
Bond advises using a consultant even for claims of less than $60,000. She says many of her clients have found only $10,000 worth of credits on their own, but these jumped to $50,000 after a loophole-savvy consultant reviewed the paperwork and interviewed the client.
YOUR PROJECT HAS TO SUCCEED
Some firms don’t apply because they can’t prove that their R&D efforts have paid off. But the SR&ED program recognizes that not every project will bear fruit.
The CRA will okay a credit — once — if you try something new and fail. After that, it gauges success not by the sales generated but by what your firm has done to develop or improve technology that enhances your product or how you produce it.
APPLYING COULD TRIGGER AN AUDIT
A bad odour lingers from the early 1990s, when Ottawa subjected SR&ED applicants to severe audits so it could claw back some of the tax credits. But it soon changed the rules to forbid this practice.
These days, says Bond, the only information the CRA can ask for is about your new product or production process, and “the worst thing that can happen is that you’ll get turned down.”