A week ago, CEO of Venbridge Garron Helman wrote an article on how the recent government incentive programs could affect SR&ED claims. For weeks now we have both listened to many companies that were concerned all these emergency subsidies may be eating up their future claims.
Companies cannot ‘double-dip.’ Assistance received under either subsidy program reduces the eligible expenses for tax credits.
We sought clarity from the Canada Revenue Agency (CRA), which has been extremely supportive of companies during this time, including accelerating SR&ED processing times. They have cleared it up for us and we wanted to share that with the Canadian tech community.
If you file for SR&ED and are eligible for the Canada Emergency Wage Subsidy (CEWS) and/or the 10 percent Temporary Wage Subsidy for Employers, you need to plan for a smaller SR&ED claim for the period you are filing that includes the period of these subsidies.
CEWS and the 10 percent subsidy programs are considered government assistance, which is defined in the Income Tax Act as assistance from a government, municipality, or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance, or any other form of assistance other than the federal investment tax credit (ITC).
So, under the tax act companies cannot ‘double-dip.’ The Department of Finance has highlighted that assistance received under either of these wage subsidy programs reduces the eligible expense base (which is primarily made up of salaries for SR&ED claims) for federal tax credits calculated on the same remuneration. Said plainly, the SR&ED salary and wages expenditures and the associated investment tax credits (ITC) are impacted by these programs.
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In terms of its impact on SR&ED benefits, the assistance under either wage subsidy will only reduce SR&ED claims to the extent that a specific employee’s salary or wages are claimed as SR&ED expenditures.
For example, looking only at the federal portion of SR&ED for simplicity, if an employee who was 100 percent SR&ED-eligible had a salary of $1,500 a week during the subsidy period, one would add the proxy of 55 percent for a total $2,325 less $847 of CEWS government assistance. In this case, the company could only claim $1,478 towards their SR&ED compared to the normal $2,325.
It is also important to note…the NRC IRAP Innovation Assistance Program will have similar implications.
The maximum amount the eligible expense base can be reduced by per employee is $10,164 if, for example, the CEWS was claimed for all 12 weeks at its maximum. This, multiplied by a number of employees, could have a material impact on a SR&ED claim. As you don’t want to miss out on any incentives, it is important to have professional assistance from your SR&ED consultant or accountant.
The reduction to the qualified SR&ED expenditures is based on the relative percentage of time spent on SR&ED-related activities versus non-SR&ED-related activities. Let’s look at how this works in practice:
For CEWS the SR&ED claim will be reduced by approximately 8 percent and for the temporary wage subsidy 3 percent. This assumes the employee works for the full year, qualifies for the full three months for the CEWS or wage subsidy and their SR&ED eligible activities are the same month over month. This is a relatively small reduction compared to the significant benefit the CEWS and/or the 10 percent wage subsidy brings to Canadian companies.
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The approach taken by the CRA is the most reasonable and fair to taxpayers, in our opinion. It will be a challenge for the CRA to determine if the claim is being prepared properly unless the T661 (tax form with the SR&ED claim) is altered to detail the number of employees who qualify for the government assistance. Alternatively, it is possible that there will be a mechanism for the CRA to approximate the appropriate effect on SR&ED claims if the portal for applying for CEWS delineates between employees that are claimed on the T661 vs. other employees. These are things for us to watch for as the year progresses.
It is also important to note that, while we have focused on the wage subsidies administered by CRA, the NRC IRAP Innovation Assistance Program will have similar implications as it is also a form of government assistance.
We believe we are very fortunate to have the leadership of the CRA working with knowledge-based industries in this challenging time. The actions taken by the CRA demonstrate that they can act quickly and efficiently to help to inject capital into the ecosystem.
The CRA is also being fair and reasonable and relies on each one of us to do the same. It is clear that by working together we can get to the other side of this trying time and continue to build the flourishing innovation economy we have come to enjoy, and the great Canadian technology companies within it.