SR&ED or SRED, Canadas's R&D program for manufacturers
SRED, is an abbreviation for Scientific Research and Experimental Development expenditures claim. It is a service provided by the Canadian Government to allow Canadian inventors / manufacturers to reduce their current or future taxes by deducting current and capital expenditures. The SRED program allows Tax deductions and/or Income Tax credits in the form of a cash refund or a reduction of taxes, or a combination of the two.
Completing a SRED Claim
To complete a SRED claim, form T661 has to be filled out with additional supporting documents dictated by the type of claim and business structure. Since Revenue Canada first uses the forms information to determine eligibility, the form should be completed by a technical expert who has great familiarity with the project. The expert could be the person who developed the process or an outside expert. The form also requires extensive reporting of expenditures related to SRED which should be handled by an accounting professional.
What follows is a description of the information required for making a SRED application using the form
In this section, basic information about you and your business is collected. This includes name, tax year, business identification, partnership information, number of projects and the names of those responsible for those projects.
The project information section is filled out by someone intimately familiar with the technical aspects of the project. There are precise guidelines about what must be explained and the manner in which it must be explained. The project information is broken down into five parts as follows.
Part A - Project definition and identification, project title, start date, completion date and field of science. Details are included if this is a previous sred project, if it is a joint work or collaboration and the location description and purpose of the SRED work
Part B - Goes into how the project advances existing scientific knowledge. It discusses experimental development, objectives of the technological advancement, what advancements were you trying to achieve, what technical obstacles had to be overcome as well as work that was performed in the tax year to overcome technological obstacles.
Part C - Details the basic or applied research that was performed and what scientific knowledge was advanced. There is a summary and explaination of how the work that was performed in the tax year advanced scientific knowledge.
Part D - This section outlines who prepared the technical descriptions, the key employees, what SRED work was performed out of canada or carried out by others
Part E - Goes into general project costs including materials, subcontracting, salary, wages and overhead related to SRED work
Calculation of expenditures
The SRED application process allows for expenditures to be deducted in two basic ways. You can offset SRED expenses against income for the fiscal year the expenses were incurred. Or you can use the PPA or Prescribed Proxy Amount method where the PPA amount is used to create an income tax credit. Your accountant can help you decide which is the best route to take for your particular company structure.
Part A - This section is where the calculation method is selected, Traditional and (PPA) Prescribed Proxy Method. Once chosen, the selection cannot be changed.
Part B - Here is where there is a full accounting of allowable expenditures, salary & wages directly engaged, specified and other than specified employee wages, both inside and outside canada, treatment of unpaid salaries and wages, cost of materials consumed and transformed, sred contracts, sred equipment lease costs, overhead and other expenditures, third party payments , capital expenditures.
Part C - This summary section is for the calculation of the pool of deductible SRED expenditures, less federal and provincial government assistance, state other and non governmental assistance, ITC's and sales of capital assets.
Calculation of expenditures for Input Tax Credits (ITC's)
Part A - This section details out prior years unpaid amounts, PPA, expenditures on shared use equipment, qualified expenditures transferred to you and government assistance provided.
Calculation of PPA
Part A - This summary section details out the total PPA available for ITC use.