When it’s time to determine the investment tax credits for the taxation year, you may feel overwhelmed by the long, complicated process ahead of you. However, breaking the SR&ED tax credits process down into manageable steps can help you navigate it seamlessly. The first step is to determine all eligible expenditures. At a high level, there are three main categories of eligible expenditures:
- Salaries or wages
- Contractor expenses
- Material expenses
We’ll break down every category for you so that you can better understand what each one entails.
Salaries or Wages
This category typically includes income and bonuses from an office or other place of employment. Salaries and wages also refer to any expenditure that is made in respect of a benefit, such as vacation pay or statutory holidays. As long as the amounts are paid within the tax year or within 180 days after the tax year, salary and benefits are considered the full extent of salary expenditures.
It’s also worth noting that the SRED program allows you to claim an enhanced amount as a gross-up on the salary base for the business’s overhead. Out of the three eligible expenditures, this enhancement provides salaries with the highest rate of return.
If you had someone else perform SRED tax credits on your behalf, 80% of the amount payable for hiring this contractor can be claimed as an allowable SRED expenditure. Be sure to note that this performer must be an arm’s length party to the company in order to qualify for this expenditure. In addition, there can be no duplication of the ITC entitlement. If you are claiming the SRED work performed by the contractor, then the contractor cannot claim it in their own SRED claim.
The final thing to keep in mind is how certain payments are regarded under CRA tax credits. Any payment that is associated with contracted (not performed) SRED work is regarded by the CRA as a prepaid expense. This means that the payment cannot be claimed per Subsection 18(9) of the income tax act.
Any materials that are consumed or transformed in the prosecution of SRED can be claimed as an allowable SRED expenditure. However, there’s a small caveat: this material is required to be an expenditure of “current nature,” which means that capital expenditures like software licensing and equipment cannot be claimed as material expenses.
As long as the materials you claim are consumed or transformed in Canada, they can come from a foreign country. To determine the actual cost of the materials, you must identify the original cost to obtain an item as well as all “reasonable” laid-down costs. These “reasonable” costs may include custom and excise duties, transportation and/or acquisition costs.
Once you take the time to carefully look over these guidelines, you’ll be better prepared to begin the process of determining investment SRED tax credits. Be sure to confirm that you fully understand each requirement for salaries or wages, contractor expenses and material expenses before you begin the process.