The Scientific Research and Experimental Development (SR&ED) tax incentives for Toronto tech startups are a great resource.
They’re geared toward helping offset some of the cost of research and development.
Of course, research and innovation are core to any tech startup.
As a result, some tech startups may be tempted to use offshore talent or local subcontractors in order to cut costs.
The SR&ED tax incentive program helps create a better case for keeping innovative research in Canada.
This often results in better work for your company, and economic growth for your community.
At Business Minding Services, we’re a team of CPAs in Markham, ON.
But more than that, we also offer a wide range of different business services.
Beyond business setup, tax planning, and CRA audit defence, we also offer Toronto area SR&ED application services.
We’re here to help your application for this tax incentive program.
In this article, we’ll take a closer look at SR&ED tax incentives for Toronto tech startups.
What Is The SR&ED Program?
The SR&ED program is designed to encourage entrepreneurs and businesses in Canada to spend money on research and development in Canada.
It’s specifically for corporations, individuals, trusts, and partnerships that are engaged in scientific research and development.
It’s important to note that this is a tax incentive, not a grant.
As a tax incentive, that means that it’s a credit that is a reduction of the amount of tax owed.
While you may get a refund if the total tax return states that the company overpaid, it also may result in your company owing less in taxes.
This program has two incentives.
Either you can claim a deduction against your income, as described above, or you can earn an investment tax credit.
In order to claim a deduction against your company’s income, you will first have to calculate the allowable SR&ED expenditures you can incur for a particular calendar year.
Then, calculate your pool of deductible expenditures.
From there, you can use the balance to reduce your net income for the current year, or carry it forward for a future year.
If you want to earn an investment tax credit, you can earn it at the basic rate of 15%.
Certain corporations may claim one at an enhanced rate of 35%.
This credit can also be used to reduce your company’s taxable income for the year.
We’ve looked at some frequently asked questions about SR&ED on our blog before, if you’d like to know more.
Why SR&ED Is Crucial For Toronto Tech Startups
SR&ED is crucial for Toronto tech startups because of how much money it can save you.
Research and development are some of the highest costs of many businesses in the tech industry.
If your startup is based in Toronto, your staffing costs will be some of the highest in the country due to the cost of living in the city.
But the benefit of being in Toronto is the proximity to talent and other early-stage tech startups.
Toronto also has access to high caliber accelerators like MaRS.
The MaRS purpose-built accelerator has a tailored program for startups and partners to help them scale their businesses.
It’s a vibrant community of innovators, mentors, and industry leaders who can help take your company to the next level.
Access to resources like this in Toronto can help manage your burn rate, and qualifying for the SR&ED helps to extend the runway of your company’s funding.
Tech Startup Activities That Qualify For SR&ED
How does the CRA decide who’s eligible for SR&ED?
In order for your tech startup to qualify for SR&ED, it has to meet both of the following requirements, along with taking place in Canada.
The first is that the work must be conducted for the advancement of scientific knowledge, or for the purpose of achieving technological advancement.
The second is that the work must be a systematic investigation or search that is carried out in a field of science or technology via experimentation or analysis.
Now, as long as these two categories are met, the type of research can be any of the following:
- Basic research
- Applied research
- Experimental development
- Support work
Basic research is research undertaken to advance scientific knowledge without a practical application.
It can take place in laboratories, and its findings may be published in scientific journals.
Applied research is research that advances scientific knowledge with a practical application already decided.
An example of this vaccine development.
Experimental development is any work that aims to discover technological knowledge in order to develop or improve materials, devices, products, or processes.
This could be the scale up and optimization of processes within a startup to enable the rapid production of their product.
Some examples of this include:
- Software prototyping
- Machine learning models
- Experimental algorithms
- Testing and trial-and-error processes
Support work can be eligible if it supports any of your startups basic research, applied research or experimental development.
In order to do this, it must correspond to the amount of the size, extent, or duration that is needed to support the SR&ED work.
Eligible support work includes things like:
- Engineering
- Design
- Operations research
- Mathematical analysis
- Computer programming
- Data collection
- Testing
- Psychological research
The key for all of this eligible work is “scientific uncertainty”, not just innovation.
But remember that your documentation must highlight systematic processes to be eligible.
That said, it doesn’t have to be complex research, and it doesn’t need to be successful either.
If you think you have something that could be applicable to SR&ED, let’s talk.
Common SR&ED Mistakes Tech Startups Make
Now, the process to get your SR&ED tax credits is a long one that requires accuracy and following deadlines.
Let’s take a quick look at some common mistakes tech startups make within this process.
1. Waiting Too Long To Start Documentation
Waiting too long to start documentation is a common mistake.
This is because one of the most frequent issues in the SR&ED process is a lack of documentation to support your claims.
Without clear evidence, the Canada Revenue Agency (CRA) may question the validity of your claim.
An example of this is a company that claimed expenses for software development, but did not provide records of coding iterations, project plans, or testing logs.
This is the level of detail that the CRA requires, which is why it’s important to maintain comprehensive records as early as possible.
These records should include project plans, time tracking, financial statements and experiment logs.
2. Overestimating Eligible Expenses
Inflating costs or adding ineligible expenses to your SR&ED tax claim can result in an audit, or rejection of your claim.
For example, you can’t add in your marketing costs, or capital expenditures into your claim.
Make sure only to include costs directly related to research and development.
This can include wages, materials, and contract expenses.
Using an accountant to accurately calculate eligible expenses can help support this.
3. Assuming Only Product Launches Qualify
Don’t assume only product launches qualify for SR&ED tax credits.
Remember, any activity conducted for the advancement of scientific knowledge or technological advancement can qualify.
This is true so long as it’s a systemic investigation in a field of science or technology.
It can be basic research, applied research, experimental development, or support work.
That opens up a wide range of eligible activities which qualify for this tax incentive.
4. Not Claiming Subcontractor Or Developer Work Properly
Not claiming your subcontractors or developer work properly can also cause issues during the process to get SR&ED tax credits.
Everything must be correctly documented, and the work must be carried out in Canada.
That includes the work carried out by your subcontractors or developers.
5. Filing Late
Finally, filing late is a common mistake made by tech startups.
You have an 18 month deadline to use your SR&ED tax credits once they have been issued to you.
Once this deadline has passed, you cannot claim these credits for the given fiscal year-end.
Don’t forget to use them prior to the 18 month deadline.
Book Your Consultation With Our Accounting Firm Today
The SR&ED tax incentive program can be a game-changer for Toronto tech startups, helping reduce costs and extend the runway for growth.
However, the application process is complex, and mistakes with documentation, expenses, or deadlines can put your credits at risk.
With so much at stake, having the right guidance can make all the difference.
By working with an experienced Canadian SR&ED advisor, you’ll gain clarity, avoid costly errors, and maximize your eligible claims.
At Business Minding Services, our team of accountants specialize in helping tech startups navigate SR&ED successfully.
Book your consultation with us today and ensure your innovation gets the full financial support it deserves.
