Cash Injection: What SR&ED can do for the construction sector

Covid-19 may have brought the construction industry to a standstill briefly but there is an often misunderstood tax relief that can help the sector bounce back.

Companies in this sector often assume they aren’t classed by the Government as ‘innovators’ — a job many assume is left to the likes of drugs manufacturers and aircraft engineers. But that couldn’t further from the truth. What’s known as Scientific Research & Experimental Development tax relief — more commonly referred to as ‘SR&ED’ — will apply to thousands of building firms across Canada and it can be worth hundreds of thousands of dollars.

Examples of work that would qualify in the construction industry include developing:

  • laser technology that helps to create perfectly level floors
  • new scaffolding designs that adapt to unusual buildings
  • ways of making building materials greener to produce

But these are just a few examples of the huge array of projects that would qualify.

So what is SR&ED and who is eligible?

SR&ED allows businesses to claim a tax credit in the form of a cash payment or a reduction to outstanding taxes. It is worth 35 per cent of eligible R&D costs up to a $3-million annual ceiling. Above that threshold, the percentage relief falls to 15 per cent.

SR&ED is underclaimed by Canadian firms in all sectors and that’s largely because, even among those companies who have heard of it, most businesses assume they don’t qualify.

This “lab coat syndrome” betrays a lack of awareness that the definition of R&D is actually remarkably wide. It’s also extremely common for knowledgeable accountants to tell eligible companies that they cannot claim or underestimate the value of claims.

The Definition

SR&ED is classified as any work that involves “systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.” As long as there is experimental development of technology, eligible activity extends to creating and improving materials, devices, products or processes. Many construction firms will be engaged in such work week in, week out.

If you are unsure whether your projects would qualify, you can use these three simple tests. They must:

  • further technical knowledge or create advancement in the construction sector
  • overcome scientific or technological uncertainties
  • do something, by design, that other people would find hard or not obvious

Most categories of expense linked to R&D qualify for the pool of expenses that ultimately form the basis of the Investment Tax Credit (ITC) calculation. These include salaries, staff costs, payments to contractors and materials.

The Practicalities to Claiming

Consultant companies, instructed either directly by businesses themselves or their accountant, will either charge a contingent fee for their services or levy a fixed charge.

This area of tax law is complex, and it has evolved over decades (the first scientific research tax credit was actually introduced as far back as 1977). An accurate gauge of the scale of a potential claim requires investigation. The consultant has to look at what innovations each company has been involved in, what solutions they provide and whether anything similar already exists elsewhere among the firm’s competitors. SR&ED claims can therefore change right up until the last minute.

Fixed fee arrangements carry the risk that the consultant is not incentivised to identify all the eligible projects and costs. As a result, contingent fees — where a consultancy charges a percentage of the total value of the claim — are often considered more advantageous.

When you see a breakdown of your claim, you will probably notice that it is split into two parts. This is because provinces have their own schemes to complement the federal programme. The 35 per cent rate applies to federal ITC, and the rate that applies in the provinces varies depending on where you are. In British Columbia, for example, it is 10 per cent. You can expect a SR&ED claim to return approximately 41.5 per cent of a project’s overall costs to the business concerned. Claims are made using the CRA’s T661 form.

Time Limits

If a company doesn’t claim SR&ED within 18 months of their business tax year end, then the benefit is lost forever. This is a colossal waste. Given the economic disruption, and the fact that companies can claim for work done over two years ago, now is a great time for firms to double check their eligibility

And the SR&ED regime has actually got even better for SMEs in the past two years. Eligibility used to be partly based on a business’s taxable income from the previous tax year. However, this rule was done away with for tax years ending after March 18 2019. Many more SMEs will now be able to claim, even if they have revenues which fluctuate a lot from year to year.

 


Richard Hoy is president of specialist tax consultancy Catax Canada, based in Vancouver. 

He can be reached at [email protected]

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