Conversations, Hiring Policies, Human Resources, Discussing SR&ED

 

Developing new products and processes in Canada can be an expensive endeavour. Finding great talent can be a challenge, but there are ways to offset the costs of finding great employees using the SR&ED (Scientific Research and Experimental Development) tax credit program.

SR&ED and Human Resources Expenses

One of the best-kept secrets is that a significant portion of human resources expenses can be recovered using the SR&ED tax credit.

Hiring and Human Resources activities are classified as an overhead expenditure. There are two methods for claiming SR&ED (Proxy & Traditional) that treat overhead costs differently. Knowing how much overhead you have and comparing the two methods, you can ensure you get the maximum back in relation to these costs.

Proxy Method: Human Resources costs included indirectly

When one uses the proxy method for calculation of the Investment Tax Credit (ITC), the government provides a “top-up” of 65% on directly engaged salaries and equipment (you can see an example in action in this post). This is meant to compensate the company for their overhead expenses, such as rent and HR. It is assumed that all fees related to hiring are included and covered by this amount.

Traditional Method: Human Resources costs included directly

When one claims using the traditional method, a company identifies and lists all of the overhead and supporting activities that directly relate to SR&ED.

In this scenario, the human resources activities such as technological staffing, contract administration, and support in personnel become part of the labour on which the tax credit is calculated. Thus, the refund on these expenses is 35 % for SMBs (large, multi-million dollar firms have a 20% non-refundable credit) PLUS the additional provincial top-ups, this can be over 50% of HR costs covered (you can see the different provincial amounts and an example here).

Using this method, if an organization spends $10,000 finding a new VP of R&D to oversee their SR&ED project, $3,500+ can be recovered or refunded when they file their SR&ED claim at the end of the year. 

Treatment of SR&ED overhead

Tables one (1), three (3) and five (5) are from the T4088 Guide to the T661.1 An additional table is from the SR&ED During Production Runs Policy.2 Keep in mind, these are interpretations of the Income Tax Act.

T4088 Table 1 - Advantages and disadvantages of the proxy method and the traditional method

T4088 Table 3 - Claiming salary or wages for SR&ED

Table 5 Overhead and other expenditures for SR&ED

SR&ED During Production Runs Policy - 3.1 Allowable SR&ED expenditures in the context of ED+EP and ED+CP Table

 

While in many cases the proxy method is by far the most lucrative way to claim SR&ED, companies can change the method they use every year they file a corporate tax return. If the traditional method works better in a subsequent year (or vice versa) you can change.

The Catch: Separating the Expenses

With the SR&ED program, it all comes down to supporting documentation. Is it clear that the costs were related to hiring someone to perform SR&ED, as opposed to a VP of Marketing? Ensure that there is no ambiguity in contracts or records/time logs that are kept. Thousands have been lost and saved in relation to a single word or incorrect phrase. In this case, the deciding point is this: are these activities directly in support of SR&ED work? Any recruiting specifically for technical/scientific purposes should be covered in a separate contract and tracked separately. In short, separate the expenses to reduce your risk of having the costs excluded.

Are you an HR professional? Differentiate yourself by leveraging SR&ED.

As an HR professional it’s important to find great candidates for your employer/client organizations, but how can you go the extra mile? Saving a company thousands while finding great talent is one way! Why not give a little extra value, by demonstrating that you’re aware of this great tax credit program for companies developing new products or processes? As a final note, whether or not HR fees are considered to be SR&ED eligible ultimately depends on the situation and the availability of proper documentation. Be sure to document everything clearly. Incorrect phrasing or contracts can lead to full denial of an SR&ED claim – something easily avoided with a little help from a professional. By contrast, correct phrasing can result in a company recovering thousands and able to employ more human resources professionals.

Interested in finding out more about how you can use your SR&ED tax credit to offset human resources costs?
Start a discussion on our TwitterLinkedIn group or Facebook page.

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This article is presented only for informational purposes and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual situation.

Show 2 footnotes

  1. Government of Canada. (November 10, 2015.) T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim- Guide to Form T661. (Accessed: August 17, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  2. Government of Canada. (November 10, 2015.) SR&ED During Production Runs Policy. (Accessed: August 17, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/production-runs-policy-1.html.

6 Comments

Dan · August 28, 2011 at 4:22 pm

This is good info about personnel costs. How about the cost of my SR&ED consultant? Are those fees deductible? After all, it’s directly related to my SR&ED research and I wouldn’t have incurred that cost if I hadn’t done the SR&ED work.

    Trevor Kempthorne · September 1, 2011 at 4:07 pm

    This is an odd area and a very good question to answer. The short answer is: sometimes. Basically, you are allowed to claim the time that one of your employees spends putting together the T661 as an eligible supporting activity. However, supporting activity costs are only used if you are filing using the ‘traditional’ method. This cost is automatically accounted for with the proxy method, so it becomes a moot point.

    However, you will almost certainly be hiring a SRED consultant using a contract, and the T661 requires that all contracts relate directly to the SR&ED work itself. No many how many big words the consultants use, they can’t turn it into a SR&ED activity, so you won’t be able to claim it.

Sita · August 29, 2011 at 3:34 pm

It is the good information on proxy method and traditional method to calculate overhead. I was wondering if any body explain which method is the best one to calculate overhead.

    Trevor Kempthorne · August 30, 2011 at 10:08 am

    Hi Sita, thanks for the comment. To answer your question, it largely depends on the company and their record keeping techniques. If the company has accurate time sheets and very thorough accounting practices and they can directly point out and differentiate between overhead for SRED activities and non-SRED activities, it is a good idea to calculate the amounts for both methods. The reason for this is that the traditional method favours, well, traditional industrial companies who have a disproportionate amount of material and overhead costs.

    The cost distribution differs dramatically from a software company where most of the wages are tied up in personnel. As a general rule, the proxy method is better for companies with payroll heavy expenses while the traditional method is better for industrial companies. If you have the necessary records to calcualte both though, do so and pick the one that will result in the higher refund!

      Sita · August 30, 2011 at 2:22 pm

      Thank you Trevor for making clear.

      Sita · September 7, 2011 at 12:02 am

      I have still some quaries on personal cost. Is there any provision for cost of employer contribution such as contribution by employer on CPP and EI ? Is these cost counted when calculating salary base?
      Thank you and would be really appreciated for your response.

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