On December 7th, I had the pleasure of attending a presentation on the Scientific Research and Experimental Development Tax Incentive Program – or SR&ED for short! The awesome group at AcceleratorYYC hosted and Justin Friesen & Jason Fitzgerald from BDO Calgary did the presentation.
What is SR&ED
The SR&ED program was created by the Federal Government to bring money to Canadian businesses and entrepreneurs who are pushing the bounds of their industry. Obviously such “thinking outside the box” requires large monetary investments. SR&ED helps companies take those risks by softening the cost via tax credits.
Last year alone the Federal Government gave away $4 billion dollars in tax credits through the SR&ED program. A typical tax credit for a tech startup can see 35 cents on the dollar – which is HUGE! Moreover any size business can apply for SR&ED; there is a cap on how much can be claimed, which is $3 million dollars IIRC. So if you spend $10,000 or $2 million on R&D you can apply for credits. The other great part of the program is that the Federal Government doesn’t cap what they are willing to give away, so like some grants or incentives there’s no money to run out – meaning that if you apply and qualify for the credits you’re going to get them.
In addition to the Federal SR&ED credits there’s also a provincial side of things. Those of us in Alberta are lucky since the Province contributes approximately 10 cents on the dollar. Jason didn’t dive too much into the details here, other than mentioning the credit varies from province to province with some provinces not even providing one.
Finally, IT/Technology/Computer Science all falls under the science section of SR&ED so tech companies can apply to receive the credits.
Who is Eligible?
There are 3 major eligibility criteria that must be met:
- Have to have a scientific achievement
- The idea here is to have some type of measurable or metrics that can prove that an achievement was made. For example: We developed an algorithm to sort an array in O(n) which beats the current best O(n log n) algorithm.
- Have to have an obstacle
- For this criterion a basic litmus test would be: can I get a company to build this for me easily? Keeping with the sorting algorithm example, you’d be hard pressed to find someone that you could pay to achieve an O(n) sort (except on eLance :P) The nice thing about the obstacle portion of the criteria is that you don’t have to actually overcome the obstacle to claim SR&ED you just have to prove that there was an obstacle for what you were trying to accomplish.
- Has to have systematic investigation
- Simply put show that you’ve actually done the work.
To be eligible all 3 criteria must be met and application should be very data heavy with these points. Jason overstated that the adjudicators are looking for intimate details here vs. features. Your customers care about the features, market to them, the government cares about how you achieved the feature.
Eligibility Threshold
Obviously the above begs the question of how is eligibility determined? Jason provided a good rule of thumb: If it takes less than a month to develop – you’re likely not eligible for credits. That gives a pretty good idea of the scope of work being undertaken. Further to this it’s important to know that internal products are less desirable than something that is for sale externally, whether that’s a SaaS, SaaP or product doesn’t matter.
One thing that was hugely interesting was that to qualify for SR&ED tax credits the advancement doesn’t have to be a success. That is, there is no criterion for a successful discovery, which is one of the reasons why failed scientific advancement is still eligible for the credit. I think that’s an awesome part of this policy because the only way you can disqualify yourself is if you don’t try! Whether you’re successful or not doesn’t matter.
Other Tidbits
A couple of other points that don’t fit above:
- Historical documentation is super valuable because it helps you prove the work was done and how long it took to complete.
- Journals, source control commits, emails, basecamp discussions, etc. all fit under the category of historical documentation. Effectively anything with a date or ability to place it within a time frame is game here.
- Obstacles are your friend; iterations are your friend. Doubly so if it’s documentably provable.
- Smoke em if you got em! If you don’t file for your SR&ED credits within 18 months after the company’s yearend you will lose the credits forever.
Take Aways
Overall Jason did a great job of distilling SR&ED into easily digestible information. It was a great presentation, and my take away was that I now know RANDOMTYPE isn’t doing the type of work that would qualify us for a SR&ED tax credit.
With that said, now that I know such a credit exists, our company will certainly be game for tackling harder projects knowing that we could have some of our costs (and thus risk) associated with such an undertaking paid for. Win!
If you’re thinking about tackling an SR&ED proposal definitely give Jason at BDO a call or email. He knew what he was talking about, and he had a technical background to boot, which would certainly make the process easier to undertake.