Over the last several weeks, the Federal and Provincial governments have launched several incentive programs—Emergency Wage Subsidy (CEWS), Innovation Assistance Program (IRAP), Regional Relief Recovery Fund (Ontario). A full list of available assistance can be found here. This is good news for Canadian businesses. However, it does raise the legitimate question about how receiving such subsidies and government funds will affect SR&ED payout.
The CRA has removed the need for reviews of newly submitted SRED applications and are approving payouts ASAP to help keep businesses afloat. That doesn’t change the fact, however, that scientific research and experimental work conducted and related expenses incurred while using government funding cannot be claimed. Under the Tax Act, this would be considered “double-dipping”.
So with increased government funding being handed out, what does that really mean for your SRED application and potential tax credit determination?
Subsidies versus SRED Tax Credits
If your Canadian-owned corporation files for SR&ED and also receives funds from any of the Federal or Provincial COVID-19 business support incentive programs during this tax year, you need to plan for a smaller SR&ED tax credit award if the tax year you’re claiming includes the period during which these subsidy funds were paid out to you.
Assistance received under any government subsidy or assistance programs reduces the eligible expense base (mostly salaries, in this case). So as the “normal” percentage of eligible expenditures decreases so does the “normal” percentage of tax credits paid on those eligible expenditures. Specifically, any government assistance provided in the form of a wage subsidy will reduce the amount of eligible payroll related expenses for SR&ED work.
If you claim the work of multiple employees, it is important for you to discuss the implications of the wage subsidy on your SR&ED tax credit bottom line with your SRED consultant. They can also help you find out about other incentive programs, and what impact those would have on your otherwise eligible SRED expenditures.
On average, companies who receive the CEWS, will see their SRED claim for wages reduced by 8%, and temporary wages 3%. Some experts believe it could be as high as 15-30% for some companies if the CEWS, in particular, is used towards otherwise SRED-eligible wages.
More than Technological Uncertainties around SRED
It still remains to be seen how CRA agents will determine if a claim is being prepared properly or if there will be any sort of method to estimate the effect on SR&ED claims if a company’s application for CEWS draws a line between employees claimed on the T661 vs. other employees. No announcement has been made, yet, as to how the CRA will attempt to determine SR&ED related payroll expenditures versus admin, marketing and non-SRED-related payroll expenditures. We can only take a wait-and-see approach with this.
One possible way to ensure the CEWS doesn’t affect SRED-related payroll expenditures is to siphon that money towards administration, marketing, sales employees, rather than employees involved in research and innovation work. While the CRA is not currently auditing companies to verify where expenditures were actually incurred and how they were funded, that’s not to say they won’t resume audits later for claims filed for COVID-19 affected tax years. That’s why it is extremely important for businesses to keep very clear records and documentation and follow tax credit guidelines for doing so.
Your SRED Unlimited consultant can help you with this and bring some clarity to this very confusing and uncertain time. Now is still the best time to submit your SR&ED claim to take advantage of CRA’s measures to help fund Canadian businesses.
Contact us and let us help you maximize your claim and the potential tax credits you could receive.