Calculating the investment tax credits for the taxation year can be a long, complex process. However, don’t let it daunt you. You’ll have an easier time navigating the entire process if you divide it into small, manageable steps. Fortunately, we’re here to help you reach the finish line with less stress and fewer headaches.
The first step is to identify all of the eligible expenditures. The three main categories of eligible expenditures are salaries or wages, contractor expenses and material expenses. Here’s an overview of every category to help you better understand each one.
Category #1: Salaries or Wages
Salaries and wages refer to income and bonuses that come from an office or another place of employment. In addition, this category includes any expenditure that is made regarding a benefit, including holidays or vacation pay. It’s also worth noting that salaries and benefits are considered the full extent of salary expenditures, given that the respective amounts are paid in the tax year or within 180 days following the tax year.
According to the CRA SRED, you have the option to claim an enhanced amount in the form of a gross-up on the salary base for your business’s overhead. This enhancement is said to provide salaries with the highest rate of return compared to other eligible expenditures.
Category #2: Contractor Expenses
This category is worth paying attention to if someone performed SRED Tax Credits on your behalf. In this case, you can claim up to 80% of the amount payable as an expenditure. Keep in mind that this outside contractor must be an arm’s length party to the business. This is the only way you can be approved for this expenditure.
Lastly, it’s important to note how certain types of payments are regarded under SRED Tax Credits. The CRA states that any payment that has been linked to contracted SRED work is a prepaid expense. As a result, the payment is unable to be claimed according to Subsection 18(9) of the Income Tax Act.
Category #3: Material Expenses
Any materials that are consumed or transformed in the prosecution of SRED can be considered a viable expenditure. However, it’s worth keeping in mind that this material must be an expenditure of “current nature.” Essentially, this means that software licensing , equipment and other capital expenditures are unable to be claimed as material expenses.
The materials that you decide to claim are permitted to come from a foreign country. However, these materials are required to have been consumed or transformed in Canada. You must first determine the initial cost to obtain an item if you want to determine the actual cost of the materials.
In addition, it’s crucial to to identify any “reasonable” laid-down costs involved in the process. These costs can include custom and excise duties, transportation and/or acquisition costs.
Carefully considering each of the above guidelines will better equip you to begin the SRED Tax Credits process. Be sure that you fully understand each requirement listed here before you get started.