1. SRED Update PMA Consulting Ltd.
October 2017

2. What is SRED? (From the CRA website)
The Scientific Research and Experimental Development (SR&ED) Program is a federal tax incentive program designed to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. The program is administered by the Canada Revenue Agency (CRA), which delivers SR&ED tax incentives in a timely, consistent and predictable manner, while encouraging businesses to prepare their claims in compliance with Canada’s tax laws and the CRA’s policies and procedures.
The CRA is committed to administering the program with fiscal integrity and to ensuring that businesses are aware of the program and can access it as easily as possible. It is important that businesses receive their entitlements under the program and that the CRA applies the legislation correctly, consistently, and fairly so that claimants receive the full amount to which they are entitled.

3. Criteria of the Program
“scientific research and experimental development” means systematic investigation or search carried out in a field of science or technology by means of experiment or analysis, that is to say:
(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view;
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view; or
(c) development, namely, use of the results of basic or applied research for the purpose of creating new, or improving existing, materials, devices, products or processes;

4. and, where such activities are undertaken directly in support of activities described in paragraph (a), (b) or (c), includes activities with respect to engineering or design, operations research, mathematical analysis or computer programming and psychological research, but does not include activities with respect to:
(d) market research or sales promotion;
(e) quality control or routine testing of materials, devices or products;
(f) research in the social sciences or the humanities;
(g) prospecting, exploring or drilling for or producing minerals, petroleum or natural gas;
(h) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process;
(i) style changes; or
(j) routine data collection.

5. Legislation
ITA Section 37 and 37.1; Section 127; and section 2900 of the Income Tax Regulations
Very few changes to the legislation since the introduction of the program. The bigger changes are in the administration of the program
The Conservative Budget 2012 announced a number of changes in respect of the SR&ED program:
Expenditures of a capital nature will no longer qualify for SR&ED tax incentives.
The rate at which overhead SR&ED expenditures are accounted for under the proxy method will be reduced from 65% to 55% over a two-year period. We are now at the 55% rate
Contract SR&ED and third‑party payments for SR&ED expenditures will only be 80% eligible for ITCs.
The basic 20% ITC for SR&ED qualified expenditures will be reduced to 15%.

6. $ Affect of Changes – CCPC Small Business
Pre-2012 changes
Post 2012 changes
10,000 Wages
10,000 Materials
10,000 Capital Equipment
10,000 Contractor costs
SRED Refund: $16,807.50
SRED Tax Credit Balance: $2,490
10,000 Wages
10,000 Materials
10,000 Capital Equipment
10,000 Contractor costs
SRED Refund: $13,902.25
SRED Tax Credit Balance: $0

7. Documentation
The biggest change is more in the administration of the program
There needs to be DOCUMENTATION - Unlike in the 90’s where CRA could see the resulting technology and understand that it took time and money to get there
Best Practices:
Birth certificate – challenges and objectives recorded at the earliest possible time in the project
Hours by person by project, with notes on activities; things tried; results
All s, drawings, scraps of paper, etc. created during the normal course of business to support that the work was done in the period should be retained
Preparer penalties if work claimed is totally unsupported

8. First Time Claimant Advisory Service
CRA has stated that it is their objective to review ALL first time claims
If your client receives a letter advising that they have an FTCAS – this is good news….the claim is accepted
A team will visit the client to advise that them of the documentation requirements going forward – it will be confirmed in writing and failure to maintain adequate information may deny payment of future SRED applications
Usually 4-6 weeks and payment is received

9. Service Standards Currently filed refundable claims – 120 days
Amended refundable claims – 240 days
Almost all amended SRED applications will be reviewed
Currently filed or amended non-refundable claims – 365 days
CRA is back to reading all applications – very few claims will go through in the 1day to 14day windows we saw in 2012
If selected for review the service standard is 180 days but that is put on hold every time a request for information is made and is pushed out by the time it takes the claimant to respond

10. Reviews Formerly known as “audits”
Generally consists of a site meeting with both a financial reviewer and a technical reviewer
Challenges usually center around agreeing on eligibility of work; and proof of such work being conducted in an experimental manner
CRA position is often that the work is:
Standard Engineering
No contemporaneous documentation to support the work claimed

11. Our Observations
The Liberal government while supporting R&D is upholding the Conservative Government’s need for compliance
More reviewers are being hired; reviews are more frequent and documentation is a must
Software claims – while in the mid nineties were the hardest to get through appear to be the easiest to justify at CRA
Shop Floor R&D – while valid in terms of technological advancement is the hardest to prove based on business practices in these environments; diligent record keeping and photographs are highly recommended to get the most of the SRED program
Food and agriculture claims – targeted by CRA as a result of aggressive consultants; valid claims exist – again diligence required in documenting claims as early as possible in the process

12. Peggy Aulenback PMA Consulting Ltd. 778-242-7324