Proxy or traditional: Which method should you choose?

Proxy and traditional SR&ED: Which method should you choose?

When filing your Scientific Research & Experimental Development (SR&ED) claim, you have an important decision to make: Proxy method or traditional method? Both have different attributes that could tailor one method better to your situation. Know the facts before you decide.

Proxy vs. Traditional

There are two ways, in principal, to calculate SR&ED: proxy and traditional. While the differences between the two types of calculations are numerous, the principal one has to do with how overhead and expenditures are tracked within SR&ED. Specifically, the proxy method does not require keeping track of these expenses, while the traditional method does. 1

Another important point is that once you have chosen between proxy and traditional SR&ED for the tax year, the Canada Revenue Agency (CRA) states that you cannot change: 2

The choice of method is made on a year-by-year basis and it is irrevocable for the year. After a claim has been filed, the method of determining the SR&ED expenditures cannot be changed.

A glance at the Canada Revenue Agency’s rules distinguishing proxy from traditional methods shows that there is more paperwork associated with the latter method. Traditional rules require companies to show that all overhead and expenditures are directly related to SR&ED, and the calculations become complex when SR&ED and non-SR&ED work is performed in the same facility. All expenditures must be explained as well as the calculations used to arrive at the conclusions for the work.

The Proxy Method

The proxy method, by contrast, does not require the need to track overhead and expenditures. The credit is based on the prescribed proxy amount that is currently “60% of the salary base calculated using directly engaged SR&ED salaries or wages,” 3 meaning that the calculation is fairly simple to perform; note, however, that this percentage is being brought down, and will sit at 55% in 2014. This is a suitable method to use if a company has a large number of employees, or the bureaucratic paperwork associated with filing the claim would be vastly disproportionate to the amount of credit received in return for the work.

The Traditional Method

The traditional method does have benefits for larger companies. There is no need to calculate the overall salary base. Tax credits can be earned on overhead and other expenditures that are actually incurred, providing a more appropriate forum in industries that have large overhead expenditures.

Conclusion: Choose the Best Method for your Company

Larger companies may find more benefit in the traditional method than smaller companies, however, which method you choose should be based upon which method will garner the most out of your SR&ED claim. Ensure that you calculate how much you may receive based on each method to ensure you calculate using the most effective method.

Proxy and traditional methods only change the claim at the federal level. The CRA stated that provincially, each method is treated equally: 4

The treatment of provincial and territorial research and development (R&D) tax credits is the same under both the proxy and the traditional methods in determining the amount of qualified SR&ED expenditures for the year.

 

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Show 4 footnotes

  1. Canada Revenue Agency. (2012). Traditional and Proxy Methods Policy. Retrieved from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/trdtnlprxymthds-eng.html#N103A6.
  2. Canada Revenue Agency. (2012). Traditional and Proxy Methods Policy. Retrieved from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/trdtnlprxymthds-eng.html#N103A6.
  3. Canada Revenue Agency. (2012). Traditional and Proxy Methods Policy. Retrieved from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/trdtnlprxymthds-eng.html#N103A6.
  4. Canada Revenue Agency. (2012). Traditional and Proxy Methods Policy. Retrieved from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/trdtnlprxymthds-eng.html#N103A6.

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