Uncertainty in SR&ED

Unforeseen interruptions in your business activities could have considerable repercussions on your next SR&ED claim, leaving your organization with a significant loss.
How can you protect your refund? Do you have the right insurance? Are you sure?

The Canadian Government’s Scientific Research and Experimental Development (SR&ED) tax incentive program provided approximately $3.6 billion in tax assistance in 2012. Expenditures such as wages, materials, machinery, equipment, and some overhead can be eligible for such tax credits. Therefore, it’s no surprise that numerous Canadian organizations have come to rely on this program in order to recover a portion of their expenses. But what happens when disaster strikes?

The Scenario?

An Ontario-based company was devastated when a fire completely destroyed their offices. For almost an entire year, their R&D (Research & Development) projects had to be shelved as they focused on more immediate priorities—salvaging what they could, setting up at a new location, and reorganizing.

When their year-end came around, they filed a SR&ED claim as they always did. However, due to the interruption of their R&D projects, their refund was only a small fraction of the $1,000,000 they had collected the year before. Not to worry! That’s what their insurance was designed to cover: business loss. However…

When they turned to their insurance to recover for this loss, they were informed that loss of their SR&ED refund were not covered under their policy. The money they had been counting on was denied by the insurance company, leaving them in a precarious situation.

Surviving Interruptions

The situation above is, unfortunately, more common than we would like to believe. In the event of a business interruption, insurance companies have different definitions of what qualifies as revenues when calculating your loss of earnings. Many insurance companies limit coverage to revenues defined as “earnings only through the services or products offered.” This obviously excludes any coverage for the loss of grants and subsidies such as SR&ED refunds. To avoid finding yourself in a similar situation, you must verify that your business interruption coverage has a broader definition of revenues. For example, some insurers will define loss of earnings as the “net profit or loss that would have been earned.” If your organization relies on SR&ED refunds, then this is an important discussion to have with your insurance broker.

Planning for the Unexpected

Do you know what would happen if your operations were to be interrupted? Particularly if you are running a multi-million dollar group, stop for a minute and imagine a scenario where your R&D activities would be forced to halt for a number of months as a result of a fire, water damage, an earthquake, or other natural catastrophe. What would happen to  the core R&D projects? They will likely be scaled back or completely halted in favour of pooling all your resources on more immediate business concerns that directly impact the bottom line in a short-term scenario. Your R&D work would very likely be using some kind of specialized equipment and the delivery of suitable replacements could take months. Not only that, but your temporary facility might not be adequate for pursuing your previous projects.

As demonstrated by the flooding in Calgary, disaster can strike at any time. Any business could be forced to interrupt their R&D activities following a disaster. That’s enough of a challenge; it’s worth making sure that, in the event of an insured business interruption, your SR&ED refund is covered, along with other insurable loss of income. Unfortunately, not all business interruption insurance responds to loss of SR&ED refunds. This is definitely not something you want to learn the hard way, like the above company. Be sure to call your insurer and find out how you can protect this valuable asset.

Did you know that all insurance isn’t created equal?
Ask your insurance professional if your refund is protected in the event of an emergency.

More questions about SR&ED?
Contact us directly or start a discussion on our LinkedIn group.
Better yet, sign up for the Comprehensive Guide to SR&ED.

About Serge Paquette:
As a Commercial Insurance Broker, Serge Paquette has developed a specialty in technology, media, and life sciences industries. His focused approach allows him to provide skilled guidance to organizations within his field of expertise.
Serge joined Globalex Risk Management in 2001, a specialty brokerage focused on providing insurance and risk management services to venture capital, technology, life sciences, clean technologies, entertainment, and media industries. Globalex has a worldwide reach through the TechAssure Association.
Serge attended the University of Quebec in Montreal (UQAM) where he graduated with a Bachelor of Commerce and went on to obtain his Canadian Risk Management (CRM) designation at McGill University.

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