VIDEO: Keeping the right evidentiary trail is crucial to qualify for R&D tax credits

“Kegham, as a technology startup, how can I offset the costs of my R&D?”

The scientific research & experimental development program, or SR&ED, continues to be a valuable source of funding for companies engaged in technology development.

This federal program is administered by the Canada Revenue Agency (CRA) with the intent to encourage Canadian businesses to conduct their R&D in Canada.

The funding takes the form of tax credits on eligible expenditures, which are salaries, contracts and consumed materials. For a pre-revenue technology startup with limited financial resources this can be critical to its financial survival.

For example, the tax recovery can amount to as much as 65 per cent on an eligible salary expenditure in Ontario, when factoring in the provincial and federal components. The provincial components are the Ontario Innovation Tax Credit (OITC) and the Ontario Research and Development Tax Credit (ORDTC).

To qualify for the enhanced tax recovery rates, the company making the claim must be a Canadian Controlled Private Corporation (CCPC). A company will not qualify as a CCPC if it is controlled directly or indirectly by a publicly traded corporation or non-residents, or a combination of the two.

"The key to filing successful claims is understanding the program and the criteria the CRA uses to establish eligibility and compliance of the claim."

The key to filing successful claims is understanding the program and the criteria the CRA uses to establish eligibility and compliance of the claim.

One of the major requirements of the program is on contemporaneous documentary evidence. Our experience has been that claimants have the greatest challenge meeting this requirement.

What constitutes this documentary evidence? It includes technical reports that explain how the activities being claimed meet the required technical criteria. You must also provide the financial transaction and documentation details to demonstrate which corporate expenditures are directly attributable to the technical activity you are claiming for the tax credit.

Early planning can be instrumental in levering existing process tools within a company's development environment to generate the necessary trail of evidence for a successful claim.

Tax planning and training of R&D staff are also important components for setting the stage for a claim that maximizes the recovery on your investment in technology development.