SR&ED Case Study #1: Software Company

How much could a software company recover claiming SR&ED in 2014? Let's find out.

Company ABC is an SME (small-medium sized enterprise) based in Vancouver, British Columbia. It is classified as a CCPC (Canadian-controlled private corporation).

Company ABC is developing a software platform to integrate their customer relationship management system and their operations management system. These systems were not developed to work together so there have been some significant challenges.

They have 4 developers (one front-end and three back-end) working on this project 75% of their time. They are employees and their salaries are each $75K per year.

Now to calculate their potential SR&ED return:

Front-end development work is not typically eligible for SR&ED claims, so we will not count the front-end developers salary for this calculation. (Every situation is different, so please contact your SR&ED advisor for a custom assessment.)

Excluding the front-end developer, Company ABC can claim $225K ($75K x 3) worth of salaries for their SR&ED claim. Since the developers spend 75% of their time on SR&ED, we reduce the eligible salaries expenditure pool to ~$169K ($225K x 75%).

Using the proxy overhead method and CCPC rates of return for both provincial and federal portions, Company ABC would qualify for ~$109K worth of investment tax credits (ITCs). Since they are an SME and a CCPC, Company ABC will receive their ITCs in the form of a cheque from the CRA (assuming their taxes have been paid in full that fiscal year). That's roughly the equivalent of hiring another developer!

Here's the step-by-step calculation:

Step Calculation
1. Determine Total Qualifying Expenditures
(Salaries of 3 back-end developers being
paid $75K per year and spending 75% of their time)		 $75K x 3 x 75%
= ~$169K
2. Apply Overhead Proxy Method to Salaries (55%)
 $169K x 55% = ~$93K
3. Calculate Total Qualifying Expenditure Pool $169K + $93K = ~$262K
4. Calculate Provincial ITCs (BC rate is 10%) $262K x 10%
= ~$26K
5. Determine Federal Expenditure Pool (Remove Provincial Portion from Total Qualifying Expenditure Pool) $262K - $26K = ~$236K
6. Calculate Federal ITCs (CCPC rate is 35%) $236K x 35% = $83K
7. Calculate Total ITCs Earned
(Add Provincial and Federal ITCs)		 $26K + $83K = $109K
*Kindly note: Determining qualifying expenditures is a complicated part of the SR&ED claim process that we skipped over for the purpose of this case study. This case study should not be used as a template to calculate your potential SR&ED return.
Can you think of a better way to increase your company's bottom line without increasing your spend? Neither can we.

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