2008 - SR&ED and IRAP - part one

A CEO friend of mine ‘heard’ that SR&ED and IRAP were ‘giving away big money this year’. So, his follow on questions were: what is it? how do we get it? what changes were there?

In this entry I’ll tackle SR&ED (pronounced: shred) which stands for Scientific Research and Experimental Development. SR&ED is basically a Canadian Government tax incentive program to encourage research and development that advances new, improved or technologically advanced products or processes. You file your SR&ED claim with your annual tax return so that you can get either a cash refund or tax credits (which can be carried forward) for expenditures in the given tax year that are eligible under the program.

In 2008, the Canada Revenue Agency (CRA) updated the overview brochure to make it more user friendly and all the form(s) (T661, Schedule 31, and T666 for British Columbians) and help guides. Of course, we at Business Ready in turn updated our SR&ED calculator if you would like to download it (shameless plug, I know).

Was ‘big money’ given away this year? Not really. A few minor changes were made to the program which included:

• Updating forms and brochures to be easier to read and promoting the program in general (which obviously worked because my friend had heard about it);
• They extended the carry-forward period for unused SR&ED tax credits from 10 years to 20 years;
• They extended the program to include certain salary or wages incurred outside Canada (which is new but is still quite restrictive);
• They increased some of the limits on annual expenditures so that you will get back more.

For a lot of startups, SR&ED is a great source of cash that is non-dilutive. Yes, it is a lot of work (mostly writing the narrative) but the process is very straight forward and if you truly believe you are working on some innovative intellectual property (whether it be a product or process) you should really check this out. To be clear, SR&ED involves three very basic components:
1. Time tracking for the number of hours associated with each “project” being considered and capital utilized for the projects.
2. Applying a cost for the number of hours and capital from point #1 which then flows through the various Forms.
3. A narrative which is largely driven by the format supplied by CRA - look closely at Part 2: Step 1 - Detailed project description.

So, get your product (#1 and #3 above) and finance (#2 above) folks together and see if you should be going after some money here! If the project was something you were going to do anyway (and you have to file your taxes each year) then why not? Typically I like to incent people to do the work by saying: we’ll give you x% of the claim as a bonus for doing the work (you’d be surprised how in to this they then get).

Good luck!