Updated to Reflect New Policies (2022)
*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. ***
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 overhead expenditures. 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 the calculation of the Investment Tax Credit (ITC), the government provides a “top-up” of 55% on directly engaged salaries and equipment (you can see an example in action in this post). This is meant to compensate the company for its 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 personnel support 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, that these are interpretations of the Income Tax Act.
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 being 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?
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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.
- Government of Canada. (December 14, 2020.) T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim- Guide to Form T661. (Accessed: September 20, 2022.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088.html ↩
- Government of Canada. (July 19, 2016.) SR&ED During Production Runs Policy. (Accessed: September 20, 2022.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/production-runs-policy-1.html. ↩