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SR&ED Tax Incentives for Canadian Companies

Business Success : Leadership : Dovico Cares : Culture

In this podcast Mohamed Parpia, Director, Scientific Research and Experimental Development at Ryan LLC joins Diane Doucet, Cofounder of Dovico Software to share how both companies teamed up and became partners to help other Canadian companies audit proof and maximize their SR&ED returns. Learn the common misconceptions surrounding the SR&ED credit. The five main questions that are used to evaluate whether SR&ED has taken place. And how documenting and tracking your projects in real-time will help strengthen your SR&ED claim.

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Full Transcript:

Diane: Hi, I'm Diane Doucet from Dovico Software. I'm here with Mohamed Parpia to talk to you about SR&ED Tax Credits. Good Day, How are you?

Mohamed: Hi Doing good. Hope you are all doing well

Diane: That's great. Maybe we can start to talk about what are SR&ED credits. It is something that we've used before at Dovico Software we develop software we have been doing it for 25 years. I know that at the start of Dovico I used to have to take care of those SR&ED tax credits by myself and it was quite difficult. I was actually really happy to find out about Ryan and how they could help. So, I thought that this podcast would be nice for other people to understand what Ryan does and how they can help other people as well. So maybe you can explain to our listeners our SR&ED tax credits and what they're for.

Mohamed: Yeah absolutely. Thank you for the invitation Diane and it is a pleasure to talk about this. Really, it's a pleasure to talk about the relationship that Ryan has with Dovico and what we've been able to do together as a partnership. So, SR&ED stands for Scientific Research and Experimental Development. It is part of the Income Tax Act and it is administered by the Canada Revenue Agency. In terms of an R&D tax credit it is one of the most generous in the industrialized nation R&D tax credits have existed in Canada in one form or another since 1944 and they've in many incarnations since then. The modern version SR&ED already has existed since 1986. Within the Income Tax Act overall or on an annual basis about four billion dollars that's a billion with a B. A substantial amount of money and therefore one of the most generous programs. So about four billion dollars is given out on an annual basis to organizations engaged in qualifying R&D activities and you know on average there are just over 24000 organizations across Canada that the four billion dollars goes to. So, you can see it's it's a very generous program. It rewards or it's an incentive type program to encourage Canadian organizations to innovate to conduct R&D to take the risks with the mindset that once they do that they become more competitive their competency level increases. They develop new products new processes be it in software or in manufacturing or life sciences whatever the case may be. And once that happens the companies become more successful they're able to hire more qualified individuals to further fuel the growth. So, at the end of the day it ends up working in their favor because now they're able the federal government and the provincial governments are essentially helping them take those risks and are rewarding them for it.

Diane: Yes, one of my questions I guess was I know that they apply to us as a software company you know for profit.

Does it also apply to non-profit organizations as well?

Mohamed: SR&ED can be claimed by any organization that's got a permanent establishment in Canada. So sometimes you have multinational companies with headquarters outside Canada who have small startup companies and anything in between. As long as you're Canadian or as long as you're paying taxes in Canada as an organization you can benefit from the SR&ED tax credit.

Diane: Right. I know that we've benefited from it since the beginning of Dovico and some years were really really good. There are certain criteria though that things that need to be done in order to be able to qualify. So maybe you can talk to us a little bit about those things, so you know what sort of tasks can you do that qualify are there expenses as well that you can that you can claim.

Mohamed: So, I think before we go down that road let's first talk about what common misconceptions people have right. And with regards to SR&ED so sometimes people think that, or a general conception out there is my work is not revolutionary I'm not reinventing the wheel or it's not going to result in intellectual property claim. So therefore, I cannot claim SR&ED that that is incorrect. Your work does not need to be revolutionary. Yes. As scientists engineers sometimes we are our day to day task is about solving problems. But if those problems are about bridging a knowledge gap. That exists or a limitation in science and engineering those sort of things can very easily qualify for SR&ED. Right. And the misconception is people think that they have to be the first to develop it. How does this product exist? My competitor has it and therefore I can't claim authority for it. That is not the case as long as that information you need to be able to achieve your objectives is not available in the public domain. You're entitled to go for authority if your project meets the eligibility criteria. You don't need to succeed. So, I mean we are all been in research sometimes with developing things and things don't always work the way we thought they would. Sometimes the project takes five six years to reach fruition sometimes. We realize that there is such a big barrier in our way that we walk away from it. Sometimes if we change our course SR&ED is not about success. In fact, failures help understand or help articulate the challenges that were faced. Right. So back to your original question in terms of what activities qualify it's any activities that are engaged in overcoming that gap in knowledge that exist. So, there are five main questions that the Sierra uses to evaluate whether SR&ED has taken place. The first is the presence of; Was there a scientific or technological uncertainty. Essentially what that means is there a gap in knowledge that existed. What is what is the limitation in underlying science and technology that prevented you from achieving your objective your objectives.

Diane: Maybe what you learned as well or..

Mohamed: that is the flip side of it right. Once there is a gap in knowledge. The flip side of that is this is what we learned as a result of reading that work. So that is the fifth question. What did you end up learning? What was the technological advancements thought. As a result of this work. The other three questions are around the process the method in which the work was done. Did you come up with hypotheses specifically aimed at overcoming that that that uncertainty was your work systematic testing that you've done to get there. Exactly what was it in a systematic manner. Are you actually creating studies as you went along or was it a haphazard or you know trial and error throwing mud at a wall and not really understanding the underlying science and technology. Sometimes we get or sometimes what is not SR&ED is when we learn that yes, we were able to do something but we don't know why. It is about understanding the why behind it. So yes, we can do it. And this is why right, or I want to try this because I think you want to try this particular ingredient to make this formulation because this ingredient has this chemistry which I think might interact with this chemistry in a more favorable manner.

Diane: I think that for us at Dovico is one of the things that Ryan has helped us throughout the years is exactly that. So just to make sure that we're able to document properly the why and the in the process of it which is a little bit different than what you would normally do in software development it may not necessarily document all of that. So, Ryan was able to your company was able to help us pinpoint exactly what is SR&ED and what isn't and how we can document that process. So that's very interesting. So, the other. There's another.. the other two questions in addition to that.

Mohamed: So, the other three questions are around the work. So, what was the hypothesis or was the hypothesis generated to help overcome uncertainties, the next question is was the work systematic or did it follow the scientific method. And the last question is; what documentation exists to help support the documentation created as a result of it. Now the goal is not to create documentation for the sake of SR&ED, the goal is to create or have the documentation created in the normal course of the work week. And that's really where Dovico comes in. Because it allows us to help track the activities of various individuals as they're engaged in their tasks. The largest component of SR&ED in terms of SR&ED credit are labour hours, so the amount of time people have spent on eligible activities and that can be hypothesis development, data collection, that can be analyisis of results programming that can be a whole gamut of different things.

Mohamed: Anything that's in support of the SR&ED work now in the absence of time tracking a lot of individuals is forced to estimate their time. So, you look at it on a month to month basis you say this is the documentation I have to support this type of work or this is the documentation I have to support what I did. And I estimate that I spent 10 percent of my time or some percent of my time in this month and we are always looking back and in SR&ED you're always looking back. So, you sometimes are looking back a year or sometimes a year and a half. And. If you're like me I barely remember what I had for dinner yesterday. So, you know the remembering what estimate of time I did a year ago is next to impossible.

Diane: And if you didn't document anything of your work it's you know pretty chances are you won't get any SR&ED at all.

Mohamed: Exactly. So that's where the Ryan and Dovico relationship really comes in because over the past we have worked together, and you've taken your software and incorporated SR&ED within it.

Mohamed: And the beauty of this is the software is so customizable that we can adapt it to the varying needs of all our clients and we work together when challenges are faced or when different issues come up. We work together to help overcome those particular constraints.

Diane: Yes. And you know we've used it ourselves for that. So, we know how it works and, in that respect, we were really happy when we were able to do this partnership with Ryan in order to collect the data for SR&ED. It worked out well for us and it's working well for our clients as well. So yeah that's very interesting. Maybe you can talk a little bit about who can benefit from this I know that us as a software company. In other software companies, you can you know you can be a startup or an existing company it doesn't really matter. You get a tax credit either in the form of a credit back. You know paying less taxes from a corporate side or you can get a refund as well. So that's interesting. What are the other types of companies that can benefit om this SR&ED tax credit?

Mohamed: Or the SR&ED program is applicable to small and large companies as well as partnerships and sole proprietorships. In other words, it includes startups companies that pre-revenue stage all the way to large commercial enterprises. There is no cap to the SR&ED program. As long as the work that you're doing is eligible under the SR&ED mandate or the criteria. It means those criteria you're eligible to make a claim. So, it's not on a first come first serve basis like a lot of grants tend to be or there or those who are capped, SR&ED program is not capped as long as you do the eligible work you're entitled to benefit from it.

Diane:And it can be ten thousand dollars, or it can be $200,000 $300,000.

Mohamed: Absolutely I mean there are companies that have millions of dollars in SR&ED tax credits that comes back to them. So, think about it in a slightly different way. If you're going to spend 10 15 hours to help document the work with us at Ryan to uncover your SR&ED expenses and your SR&ED claim is going to be about 100,000 thousand dollars what is that return on investment you just had. And that hundred thousand dollars is going straight to the bottom line definitely. So, the type of industry for SR&ED. But go back to your original question the type of industry doesn't really matter as long as long as the work is in natural sciences or an engineering field so it's applicable to information and communication technologies it's applicable to manufacturing oil and gas agriculture biotech food, name it, as long as you're doing that work in Canada and that you're learning something and you're learning and you're doing advancements in technology. You're or in science or the underlying technology in terms of what can you really claim or what's the bang for the buck. That's the work that's being done when you're pushing the bounds or you're trying to overcome the limits on science and science and technology. Well what can you really claim so we can claim labor expenses for the amount of time people spend on this on eligible activities to their wages or their wages. Or essentially a portion of their wages right. If the person spends 10 percent of his time, then you're claiming roughly 10 percent off of the wages, but you get back maybe a certain percent of that. OK so this labor component and then there is contractors who might be using contractors to help you do the work. Maybe third-party labs or individuals who work for US contractors consultants you know people who are skilled in the art. You might be using those. So those expenses can be eligible material expenses are also eligible so maybe you had to buy trial materials or prototype or materials to make a prototype proof of concept. Those things are also eligible for SR&ED. The last component is overhead expenses. So as long or it's understood that as an organization you're going to have overhead expenses to keep the lights on and do a whole host of things. So, your individual your employees can engage in, so your overhead expenses are also can also be eligible Diane- And computers as well hardware things like that servers? That is more of a capital type of costs. And those have been specifically excluded from SR&ED since 2013. Okay. But going back to your other question so once you have your eligible labor and contractors and materials and your overhead costs.

Mohamed: So, what can you really recover so you can recover. Up to about 49 percent of eligible salaries. So, it is a significant recovery. And if you're a small CCPC a small Canadian controlled private corporation below the threshold limit your rates can go as high as 74 percent. For contractor costs for large organizations, you're recovering about 25 percent or up to about 25 percent. If you're a small CCPC that number shoots up to close to 38 percent for materials consumed. Large organizations are at about 32 percent and for small organizations CCPC type organizations we are at 48 percent. So, the return on or that's what I meant when I said the SR&ED credit is a very generous program. It really rewards you for undertaking that risk to do the work. Right so in terms of. Tax credits or in terms of the shared program it's made up of federal components. So, there is a federal tax credit. And if you're a small CCPC you get the enhanced rate that the enhanced rates refundable so comes back to you as a check. Or it's used to offset your taxes otherwise payable or the tax credits that you get if you don't have any tax payable can be carried forward for up to 20 years or can be carried back three years and applied to prior taxes already paid. I didn't know that. That's interesting. So many clients tell us that they look at SR&ED preparation as a business project.

They look at the time they invest with us as an investment they look at the time that they spend with us as an investment and it is the highest value of the work to do.

Diane: Right. Because you know want it or not R&D costs are work that you do for the future you can't necessarily, you don't necessarily have a product that you can sell yet for that work. And so, SR&ED tax credits sort of help offset the cost of that future work. Now you're working on to you know to help pay for that for those expenses.

Mohamed: So, it's an incentive program. It's incentivizing you to take those risks to develop that product to level up that process because if you don't do that you will lose market share. You will go out of business. And once you go out of business the people you have employed will be unemployed. We'll have to find other places to work. So, this is really driven to help you take that take that risk. OK. We see this. Let's go for it. And as an incentive program, you say OK you know given that it meets these criteria there are chances for us to go after SR&ED tax credits so maybe our cost of investment is not as high. Maybe we can get these investments or these credits and that'll help lessen the blow. But once you develop it once you've taken that that risk in developing that product process now you're that much more competitive. You now have a market edge and that is going to result in you hiring other people to help fuel your growth. And that is now creating employment. So, it becomes a cycle. Once you have a product that's going out well out there. Guess what you're going to try and improve it you're going to try and go after other things those improvements in and of themselves can be SR&ED. So, as you're hiring people to continue improving those your existing products or processes your claims tend to become larger. And it feeds on itself. So now you have more money to invest and there are organizations we work with who dedicate a percentage of their income towards R&D with this notion that we are going to benefit from it. Once we file our corporate returns.

Diane: Even at Dovico I think you know. I would estimate at this point in time that over 50 percent of our costs are for future work. You know it is not for things that we do that we need for operations of the company is just working on future products future things that we want to launch. So, SR&ED tax credits are important and there's two things that you know I found during the years that Ryan was able to help with the documentation you know of course using Dovico Timesheet is for us essential because you need that documentation. You can't get around that. You need to show proof that you know what the what people did and what they worked on. So that helps but when it comes to figuring out what is SR&ED and what isn't SR&ED is a little bit difficult sometimes and there is a fine line between the two. And I found that Ryan was able to help us sift through all of that and help us determine what applied and what didn't apply so that we had a better case with Revenue Canada. Because what happens often is that if you don't have that documentation you don't have that solid foundation of what you're submitting then it gets refused.

Mohamed: So, let us talk a little bit about what Ryan is and why you really use Ryan for SR&ED will all these points that you're touching on because these are a hallmark of the Ryan success model that we have regarding SR&ED. So, Ryan is a leading global tech services firm with more than 25 years of industry excellence. So, we are not only here in Canada we are headquartered in in the US in Dallas. We have operations all over the US. We have operations in Europe in Asia Singapore India Australia. So, we are global we are everywhere in terms of the SR&ED credit so with the SR&ED team consists of professional consultants who have vast experience in their field of science. So not only are the team members on the SR&ED team knowledgeable and experts in SR&ED that also have the industry experience to back it up. So, they have all worked across the table on the other side engaged in R&D they all have felt the pains of documenting and fighting with the CRA. They all know how these things work. They all know how industry or R&D works and we are able to combine the two. So, in the in-depth knowledge of our folks of our team backed by our comprehensive approach really helps drive the SR&ED practice really helps drive us to uncover SR&ED where typically it might get mixed we pride ourselves at educating our clients on what is authority, so they are able to have a better understanding of not only where does it get. Not only in terms of the financial benefits that a corporation might have but from an engineer or assigned or assigned scientist's perspective they're able to understand what qualifies and why it qualifies. And have a better appreciation for the work they do in driving the bottom line for the organization because sometimes if you think if you're in an R&D environment you think OK. My only contribution to the growth of the company is if I'm going to be able to make this product work right. And that's not really the case because sometimes developing a product or a process can be a multi-year endeavor. Or more! Absolutely. If you're doing that you're realizing that. Once you understand or once they tend to realize what SR&ED is they realize that their day to day activity whether the product is going to be successful or not is driving financial results for their company for their organization from day one. Ryan's claim preparation process has an immense or really resonates tends to resonate with this theory. We don't play auditor roulette. We don't. Or we prefer to do the work upfront so that when CRA decides to come in for a review our information is all there. So, we prepare our all our claims with that mindset.

Mohamed: All our teams are audit ready.

Mohamed: The result of doing that is yes it takes us more time to prepare but the flip side of it is it has helped us really establish a very strong reputation within this area. Our audit rate is one of the lowest in the industry to the average industry audit rate or the number of claims that get pulled for review in a lot of forums is as high as 35 40 percent. Ours is 4 or 5 percent

Diane: Yes, once it gets into that review process is very difficult. If you don't have the proper documentation, chances are you're not going to get that credit. We've had that happen to us before you know before we had Ryan. It was very difficult to make sure you had everything that you needed to have a good claim. And I've even seen some years where you know once we started working with Ryan that our claims were higher.

Mohamed: So that comes from two or that comes from two places. So, one is the expertise of our individual of our team members to be able to uncover SR&ED in all different areas. A lot of or sometimes people tend to think the SR&ED credit is only for new products that I develop and they tend to miss out all this process development type work or it has to be successful and things like that is really comes in from understanding what SR&ED is and it comes from understanding Or having that industry experience when our team members go out and interview the projects it really helps understand what the industry is like so that helps drive increased SR&ED claims. On the flip side we have the lowest industry audit rates. As I mentioned. That comes from ensuring that the claims are fully supported. We will stand behind our work 100 percent. We will do whatever it takes to defend our clients because we were the last thing we want to do is waste your time and frankly waste our time in preparing an SR&ED claim when there is no SR&ED right. So, we will prepare, organize we'll review everything upfront. So that when the claim is prepared it's a process. Ryan's sole focus always is customer satisfaction. Not only our claims going to be very solid and highly defendable in all those aspects to it but at the end of the day what we really value is client or customer and client satisfaction. We invite all our clients on an annual basis to grade us and provide their feedback and that feedback goes to a third-party center, so it doesn't it's not internally, we've outsourced, and it goes to a third party and we collect the results from there. The SR&ED team a couple of years ago had 99 percent success rate or 99 percent customer satisfaction rating. Within Ryan if you're below 95 percent you have a problem. You have to piece together a report and corrective action measures and all these things and that goes all the way up to the CEO. He has to sign off on them. So yes, we are a global organization but the CEO himself is driven with client satisfaction. So, for us the mandate really becomes ensuring that our clients are as happy as they possibly can. And the only way they're going to be as happy as they possibly can be is if they're getting the claim they are on time and within the agreed upon timelines getting a robust and highly defendable claim they're getting. If the IRA comes in for review they're getting full Ryan support in defending their claim. Ryan stands with there and uniquely in the Ryan prepares 100 percent of the way. So, we are there from start to end. We do all the heavy lifting. Think of us as an extension of your team. You spend a few hours with us tell us what you did. But even if it means for us to come and stand by a photocopier photocopying all the documentation we'll do it. And that's where Dovico really helps us because it's a solution that not only helps time track, but it also helps us collect documentation as the work is happening. So, we've used Dovico, not I mean yes, we've done your strategy and we've used Dovico help support us but we've also used Dovico for a multitude of organization in a whole host of different industries. We've adapted and customized Dovico as for the industry requirements or depending on what different clients want and that's the beauty of Dovico. One of the things our clients really tell us that they really like about Dovico is the ability to run customized reports on an as needed basis. It allows the Ryan team to be on the same page as the individuals who are doing the work. So, one of the aspects of SR&ED is yes, you're always looking back. You're always looking at work that was done a year ago or more than a few months ago. Dovico helps keep that current. But because of the Dovico functionality, we are on tune or we get reports on a monthly basis, so we are aware of what's happening in real time as you're doing your work

Diane: and it could make the difference I think in having a claim that is sustainable and one that you know will be refused.

Mohamed: Absolutely. Because you're entering your time you're entering the task that you did at that time you know you're putting in a or a couple of sentences around what that what those hours were for what you were doing. So, it really helps build that up. It's done in real time. So, it really helps strengthen the SR&ED claim rather than you know putting your thumb out in the wind and thinking maybe about 10 percent.

Diane: Not really that doesn't work that well. If it does is you're still you know you're cheating yourself because maybe, it's 15 but maybe you could be claiming a lot more. You know you don't know it until you really track it. Right. The other thing that I know that has helped us throughout the years with writing is the fact that you come in and talk to our team personally and show them you know at the start you did that and you know you can do that throughout the years. Again, I'm sure. Explain to the team what is SR&ED how it works and so that the guys and the people that are doing the work understand what it is for and why they need to track. So that's, It's like a training session. I don't think you charge for those sessions either.

Mohamed: No in the way we prefer to do shred is in a proactive manner. We hate to be reactive. Yes, when we get a new engagement we are we are a little reactive we are looking back we are understanding their culture their way of doing things. The greatest benefit of Ryan comes when it is the second or third year of the engagement with Ryan because at that point we really understand everything about your organization and that allows us to become proactive. So, we like to not only use Dovico on a month to use the reports within Dovico on a monthly basis to understand what's going on, but we like to meet face to face. Like you say with the clients on a quarterly basis. So, we are not only able to talk about the work that they are undertaking now. We are able to talk about work that they are planning on undertaking in the next little while we are able to train them on SR&ED were able to help people go through those small deviations where things are maybe not getting as tracked as well as they should or things that those things are able to get addressed in a timely manner. We are not waiting until the end of the year and saying oh wait we did we use this system. But you know here are all these people who didn't track their time on for six seven months and now we know either we can estimate their time or are we going to leave them out. So, it helps us avoid all these issues.

Diane: Right. So, I think that you know to wrap it up a little bit for us and unless you had anything more to add.

Mohamed: The one thing I'd like to add over here is you know whatever or by working with Ryan your engagement with Dovico gets covered free of cost as long as you're working with us and allowing us to do your SR&ED claim we will cover any licensing fees with using Dovico.

Diane: So, our Dovico licenses. Yeah that's really nice and I know that a lot of people a lot of our clients have benefited from that.

Mohamed: yeah. So, we cover that. That's on Ryan to cover those expenses and Dovico software is not software but you can also use it on your mobile phones or on devices like that it really becomes easy really have no reason and organizations are going to tend towards going towards maybe a more stronger time tracking for not only for SR&ED purposes but to really get a handle on the time various activities are taking their employees.

Diane: Yeah I guess you can you can track both SR&ED projects and non-SR&ED projects as well if you want to take care of or know how much those projects are costing some companies I think prefer just to track SR&ED related projects and tasks and other companies prefer to track everything and they can do that with the as well.

Mohamed: Absolutely. You know some of our clients do either one some use it for SR&ED projects or the ones that on a quarterly basis we end up triggering as this would be a SR&ED project and then they begin tracking their project that that particular project. We have other clients who track 100 percent of everything they do through Dovico. But Dovico Is it a software system. It really helps track time and expenses and tracks documentation because you can upload your pictures and invoices and a whole host of other things. And then you couple that with a short interview session with a Ryan individual to really explore what that project was about. And that's the perfect strategy.

Diane: I think so too. That's why we partnered! Great. So, thank you very much Mohammed. I think that this was very educational for some people maybe that they didn't know that this partnership existed or what SR&ED was, and I hope that it enlightens some people. I thank you very much for your time.

Mohamed: And you know if there are any questions where people might have regarding shred you know feel free to reach out to either Diane or myself would be more than happy to try to talk to you would be more than happy to expand on anything that we've talked about over here.

Diane: Well we'll be sending on our Facebook page some documents to people interested downloadable maybe on our website I'm not sure yet but anyone who's interested we have some documents available to further explain the shred and to further explain the partnership and how it works.

Mohamed: So yeah great. Thank you again. Have a good day everybody!

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