By Chris Cottle, Boast CMO
Each year, the Canadian government provides over four billion dollars to innovative businesses for developing new or improving existing technologies, products, materials, and processes through its Scientific Research and Experimental Development (SR&ED) tax credit program.
Since every small and medium business needs capital for innovation and growth, claiming SR&ED tax credits is one of the cheapest ways to maximize capital and reduce tax liabilities.
Often, your SR&ED tax credits come back to your small business in the form of cashback, and in other cases, the tax credits come as a payroll offset or other form of tax liability dilution. In any event, businesses that are inventing something new, taking risks, or investing in the development of technology, may qualify. For small companies, government tax credits are a fantastic way to get a chunk of your research and development investment back.
As part of a yearly tax claim submission, small and medium businesses may be required to provide reports outlining the time and costs attributed to new innovations over the past year. These records are found in your project management systems, and the associated costs are tracked through your payroll systems.
Are You Creating Anything ‘Innovative’ That Qualifies for SR&ED Tax Credits?
For work to be considered innovative research and development, there must be elements of creating something new, risk of potential failure, and challenges to overcome. A summary from the Canadian Revenue Association (CRA) SR&ED Guidelines states that work must be:
Advancing Technology—The work carried out in the experimental development activity must generate information that advances your understanding of underlying technologies and furthers technical knowledge.
Include Technological Uncertainty—These are the technological problems or unknowns that cannot be overcome by applying the techniques, procedures, and data that are generally accessible to competent professionals in the field.
Technological Content—The project must have been conducted in an iterative, systematic process with documentation.
Answering the “Why” Requirement—Work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement. The key to both is the generation or discovery of knowledge that advances the understanding of science or technology. Note that success or failure in meeting your objectives is not relevant when assessing whether your work meets the “Why” requirement.
Addressing the “How” Requirement—Work must be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis (contained at the beginning of the definition).
What Can You Recover with SR&ED Tax Credits?
The SR&ED tax credits you can recover vary based on how much you invested, and the type of investment. But Canadian small and medium businesses may be able to recover up to 64% of their R&D spending. Calculating potential tax credit claims can be easy using an online calculator.
Small and medium companies can claim the following general areas related to their R&D:
Canadian-based Salaries: The company makes regular payments to employees
Canadian-based Sub-contractor Fees: The company contracts with an arm’s length party to perform R&D or SR&ED eligible work
Materials: Materials consumed or transformed in the process of R&D or SR&ED eligible work
How Much Could a Small or Medium Business Claim?
Consider the following hypothetical example of a small Canadian technology company:
Company ABC is developing a software platform to integrate their customer relationship management system and their operations management system. These systems were not developed to work together so there have been some significant challenges. They have four developers working on this project 75% of their time. They are employees and their salaries are $75,000 per year.
Considering regulations regarding the type of work that can be included, Company ABC could claim $225,000 ($75,000 x 3) worth of salaries for their claim. Company ABC could qualify for $109,000 worth of tax credits. Read more.
Do Small and Medium Businesses Qualify for Government R&D Tax Credits? Share on XWhere to Begin?
Your finance department may already have the information you need to start a tax credit claim, but you will also need to gather data from engineering project tickets and classify them into subgroups. Once done, assigning the right people and time to each invention is next.
Although the claims process can take some time, the benefits can be worth it. Receiving cashback for R&D spending can mean hiring more developers more quickly, innovating faster, and growing faster. And innovating faster and getting to market quicker has a direct and positive impact on a SaaS business’s valuation.
- What Are the Benefits of Pursuing R&D Tax Credits?
The SR&ED tax credits cashback refund and the ability to quickly reuse those refunded dollars to further innovation and hiring investments - Improving future cash flow
- Increasing M&A valuation multiples
- Fostering organizational process for R&D documentation, transparency, and accountability
Ultimately, the decision to pursue and accumulate R&D tax credits for your SaaS business has broader implications than on the surface, such as a cash-back refund. Consider, for example, the future value of assets and how they could impact different business outcomes that your organization could encounter. The benefit of accumulating R&D tax credits easily outweighs any cost to pursue them. Read about Neo Financials’ focus on SR&ED and their use of tax credits
Author, Chris Cottle, Boast CMO
Boast Can Help Maximize Your Small Business-Eligible SR&ED Tax Credit Claims
Boast helps Canadian organizations accelerate innovation using government SR&ED tax credits. Boast software integrates financial, engineering, and project tracking data to increase the speed, accuracy, and size of eligible R&D tax credits. With operations across Canada, more than 1,000 innovative companies have leveraged Boast to get more money, faster, for less time and risk.
