Canada’s Scientific Research and Experimental Development (SR&ED) tax incentive program helps companies develop, improve, and create within their business by providing investment tax credits on qualified expenditures. Derrick Fung, entrepreneur and founder of Tunezy, has used the incentive program as a financial buffer when reaching the next round of financing or milestone.

Recently, the Canadian Revenue Agency (CRA) has become more stringent with the SR&ED tax incentive resulting in a decline in claims, reporting 24,300 claims processed in 2014-2015 down from 30,500 claims processed in 2010-2011. Auditors visited Tunezy’s Toronto office to review and investigate the company’s claims made under SR&ED.

The CRA noted a more “cost-effective and less generous” SR&ED program in the 2012 federal budget, with changes to the 2013 federal budget to “address non-compliance and protect the fiscal integrity of the SR&ED program.” The announcements, they noted, may have affected the CRA’s intake of claims.

The SR&ED is not “easy money” however with the correct documentation the incentive can help companies grow through research and development. Bryan Watson, partner at Flow Ventures, says many new companies are unaware of the administrative documentation required for the incentive. He recommends having the “best documentation possible” in order to avoid a CRA verdict of “unsubstantiated” on the claim.

Appealing a verdict on a claim can take time and resources, of which most companies would rather spend on building their businesses. CRA audits can also slow the process of receiving tax refunds.

In order to avoid this, companies like Drop have a focused team to prepare the financial and operating information required in making an SR&ED claim. Although the efforts are time-consuming, the tax incentive allows companies to do more research and development to encourage positive growth. Small companies that may not normally invest in these activities have an incentive to do so using SR&ED.

Contact a Swanson Reed Tax Advisor for assistance with processing SR&ED tax incentive claims, or to learn more about the program.

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