The amount of compensation a business owner-manager can claim for SR&ED tax credits is limited by their company’s structure, or the manner in which they compensate themselves. Here are three common pitfalls that you need to watch out for:
1. Declaring a bonus at year-end instead of paying salary
Owner-managers typically wait until the year-end of the corporation to determine how much to pay themselves for the year. Unfortunately due to Subsection 37(9) of the Income Tax Act (“ITA”), “an expenditure on or in respect of SR&ED carried on in Canada does not include a bonus or remuneration based on profits, in respect of a person who is a specified employee”. A specified employee is any employee who owns more than 10% of the corporation.
This means if you are an owner-manager and you wait until the end of the year to pay yourself, the amount paid will not be eligible for inclusion in the SR&ED claim. Only salaries paid over the course of the year would be eligible.
Note that this is not the case for regular employees. For non-specified employees (individuals who own less than 10% of the corporation), bonuses or remuneration based on profits must be an expenditure on or in respect of SR&ED to be eligible. This means that if the amount can reasonably be considered to be in respect of the prosecution of SR&ED, then it can be considered eligible.
2. Salary limitation
The maximum salary that owner-managers can claim for SR&ED is limited to five times the year’s maximum pensionable earnings (YMPE). For 2016, the YMPE is $54,900, which means any salary over $274,500 is not eligible for inclusion in the SR&ED claim.
Bonus: click here to download this 20-page SR&ED Guide to learn everything you need to know to prepare a successful claim.
3. Not paying salaries and wages within 180 days
Accrued salary or wages are eligible for calculation in the SR&ED claim however there is a requirement in the ITA to pay these remunerations within 180 days as of the end of the year. If the remuneration remains unpaid 180 days after the end of the year in which the expenses were incurred, the expense is deemed not to have been incurred in the taxation year, but rather in the year in which the amount is paid.
The good news is that if the expense is paid in another year, another SR&ED claim can be filed to claim the unpaid expenses that were incurred previously. This amount doesn’t just disappear; it just gets moved to the year in which it is paid. However, in order to capture the benefit of the SR&ED in the current year’s claim, the amount must be paid within 180 days of the year-end.
There are other areas to be considered such as rules for associated corporations, accumulated benefits such as vacation time, and stock option benefits. Your SR&ED advisor can assist in avoiding common pitfalls and dealing with each of these more complex scenarios on a per case basis.