Release date: May 13, 2011
Guest: Shawn Reain
Running time: 8:28 minutes
In this Tax Tracks episode, Shawn Reain discusses how to take best advantage of the SR&ED program, what can be claimed under this program and how to be more efficient with your claims.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry: Today’s episode deals with SR&ED, that’s Scientific Research and Experimental Development or “shred” for short.
Shawn Reain, a partner in our Calgary office who specializes in SR&ED, will provide his insights on how companies can get a lot more tax benefits from their efforts in this area. Shawn has dedicated his practice and career to SR&ED for the last 11 years.
Shawn, is it acceptable to pronounce the abbreviation S R & E D as “shred?”
Shawn: “Shred” is just fine.
Gerry: Shawn, in your opinion, are companies not taking advantage of the generous tax credits that the SR&ED program offers?
Shawn: With few exceptions, the concern is not so much that companies are not using the SR&ED program at all, it is that many could be much more efficient in the way they identify, track and capture the SR&ED they are undertaking.
Gerry: What kind of efficiencies do you have in mind?
Shawn: Well, based on what I see in the marketplace and in my practice, I’m thinking of three things for any particular SR&ED claim:
Gerry: So, by reducing time delays and effort expended and recognizing activities that qualify as SR&ED claims, will these things add up to a significant opportunity?
Shawn: Gerry, it can be large! Of course it depends on the company, but at a minimum the claims become more reliable and defensible, However, it is not that unusual for us to see a doubling of tax credits.
Gerry: Very impressive! How do you increase the tax credits that much for your client?
Shawn: Well, essentially it’s pretty simple: we help set up processes that speed things up, reduce the time invested and make it much more likely that appropriate SR&ED claims actually get made.
I think it might be good right now if I gave you a little background. The SR&ED process can be demanding and laborious. It has made certain companies question the value of filing a SR&ED claim at all as it traditionally takes too long.
You may want to have to the right kind of information in the right form at the right time. The Canada Revenue Agency, or CRA, demands this. They have been focused on comtemparaneous documentation. When a claim is prepared 18 months after a taxation year, I have seen some claims denied due to this lack of documentation. The problem is that for many companies SR&ED claims tend to be an afterthought.
You and I might think that the world revolves around tax because we deal with it every day, but people running businesses or people in tax functions have all kinds of things to deal with that take priority. If a company is developing an important new process, product or improvement, the Income Tax Act probably isn’t what they are thinking about. So naturally the SR&ED process can be a bit of an afterthought.
I am the first person to admit that companies are not in the business of filing SR&ED tax credits, but I do feel that the process does not have to be so laborious.
That all being said, I have seen a real positive trend in companies trying to be more proactive with their SR&ED claims. Now the recent economic downturn may have had some hand in that change.
Gerry: So, you’re seeing a trend in companies pursuing these valuable SR&ED claims?
Shawn: Yes we are Gerry, but still some companies are choosing not to file at the appropriate time. Many times the claims don’t get looked at until months and months later, and that makes it a lot harder and a lot more expensive to put together the information that the CRA needs, and problems and delays tend to compound from there.
Gerry: Well, how do you fix that?
Shawn: Well, basically, we recommend that companies have a proactive process in place so that they capture the right information as they go. Layered on top of that process is an education process that operations can identify eligible projects early in that process.
Gerry: Does the PwC SR&ED team provide a system to do that?
Shawn: Actually, we don’t provide a whole IT system. We do have a team that can help guide you through setting up a process. We find that most businesses don’t want or require a whole new IT system to deal with gathering their SR&ED information. Usually the best approach is to tweak existing systems, for example like accounting time reporting systems, to identify, track and help the minimize the amount of time internally it takes to file their SR&ED claims.
That being said, we do have a secure web-based application that can aid in the SR&ED process that companies implement. However the starting point is the client’s systems.
Gerry: And you contend that’s enough to generate an increase in their SR&ED credits?
Shawn: I can’t promise that, but sure, it’s possible.
I should emphasize a couple of things regarding where companies may be leaving money on the table:
First, even though the SR&ED program has been around for many years, some organizations still picture only work being done by people in white lab coats as qualifying for these SR&ED tax credits. That type of work could be eligible, of course, but lots of qualifying projects are not like that at all. Many different kinds of work can qualify by definition. SR&ED activities may qualify if they improve a process, product, device or material.
Secondly, it is important that the organization flags potential SR&ED claims early, and right away start capturing the information that will be needed to support a SR&ED claim. There are two real advantages for early identification of claims:
Gerry: It’s surprising that companies are missing significant dollars to which they’re entitled.
Shawn: I know, Gerry, but here is just one case. Recently I was working with a company, to implement a process to proactively identify SR&ED opportunities. When we went in, they had nine claims, and when we were done, there was over 40. Their tax group was unaware of some of the projects that were going on in certain divisions.
Now, that isn’t necessarily typical, and you have to look at the value of the credit as well as just counting them, but dramatic increases in SR&ED tax credits really are possible, and the key is to have a systematic, proactive approach in place. You need to identify the projects right at the start, and immediately start collecting the kind of information you will need when you make a claim.
When that happens, you cut down drastically on the amount of time chasing after information that might be in the heads of people who have since left the company, or sifting through old flies like an archaeologist.
And you also avoid unnecessary rework – you have information when you need it in more or less the right format.
Gerry: So, the point of your story is that being organized when dealing with SR&ED you won’t miss claims altogether, your claims process will be more efficient and you will get your credits a lot faster.
Shawn: Exactly Gerry. With a little up-front effort, companies can get the most of the generous SR&ED tax credits. In my experience, it really pays off.
Gerry: Thanks, Shawn.
We’ve been speaking with Shawn Reain about how companies can get the most from your Scientific Research and Experimental Development (SR&ED) Program. For additional information on SR&ED, please refer to our PwC website www.pwc.com/ca/sred.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.