SR&ED with Vipul Jain | E101

Speaker 1: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award winning financial planner and entrepreneur Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. And now your host, Jason Pereira.

Jason Pereira: Hello, and welcome. Today on the show I have Vipul Jain, an accounting and tax consultant who helps business owners file for SR&ED credits. What they are, and how you file for them, and how they can benefit business owners is something we're going to dive right into. So with that, here's my interview with Vipul.

Jason Pereira: Vipul, thank you for taking the time.

Vipul: Thank you for having me, Jason.

Jason Pereira: So Vipul Jain, tell us about what it is you do for a living.

Vipul: Yeah, so I have my own accounting and tax consulting firm. I also provide virtual CFO services, specializing in SR&ED filings, focusing on small and medium-sized businesses, and especially tech startups.

Jason Pereira: Excellent. Okay, so let's start off very quickly by talking about what SR&ED is. And this is not spelled s-h-r-e-d, it's... So it's, I screwed up myself, S R and E D. So what is the SR&ED program?

Vipul: Yeah, great question. So SR&ED, just commonly pronounced as shred, stands for Scientific Research and Experimental Development. What this is, is a very generous and popular tax credit program provided by the CRA. So the CRA provides both refundable and non-refundable tax credits through this program. It encourages small and medium-sized businesses, corporations, to conduct R&D, which will in turn be beneficial both for the businesses and also for Canada. And finally, like in today's economic climate, it's a great source of non-dilutive capital. You get the money, the refundable credits, and a small part is non-refundable too. The money comes to you, and it's great to reinvest into your businesses, and it's totally administered by the CRA.

Jason Pereira: Okay, so basically, let's talk, so bottom line, and these can be very lucrative. Like, how big do these credits get?

Vipul: Yeah, so great question. So these refunds, let me talk high level. Let's assume you're a Canadian-controlled private corporation, a CCPC, which most startups are. You can get up to 66% of your salaries to employees reimbursed, so that's super lucrative, and you have to have those employees within Canada, that's a key point. Now let's say you have contractors, right? You can get 35% of that expense reimbursed. And finally, let's say you're doing some sort of experiment based on using some materials, then you can get up to 42% of those expenditures refunded. And just to give you an idea, in addition, of how big this is, about 20,000 businesses annually apply for this and have received up to three billion dollars of credits each year in Canada.

Jason Pereira: Excellent. So I mean, 66% is enough to attract anyone. Quite honestly, you'd be foolish not to be attracted to it. Okay, so let's talk about what qualifies. So what would qualify? Because I mean, anyone listening to this is saying, 66% of my employment costs, sign me up, right? But it's not everything. So talk about what does qualify, what doesn't qualify.

Vipul: Perfect, let me talk about both things, what's in scope and what's out of scope. So in scope, what is defined as qualifying work is something where you're involved to resolve a scientific or a technological uncertainty. That means there has to be a risk of failure. If you're doing something which is, you know, totally routine, like quality control, routine testing, market research, sales promotion, none of that qualifies, because that isn't covered under SR&ED. So ask yourself these two key questions. The work you're doing, does it have some sort of technological or scientific innovation at the core of your business? If you say yes, great. And are you experimenting with new ideas and approaches to solve problems? If your answer is yes, and the information that is involved is not publicly available, there's a very good chance you are eligible for SR&ED.

Vipul: Now let me give you examples of what is not eligible for SR&ED, even if there is some sort of scientific or technological uncertainty. If you're doing research in the field of economics or business, psychology, humanities, all of this is totally out of scope. And also, like I mentioned earlier, you cannot have expenditure outside Canada. Say you're doing all of this, but you have contractors outside Canada, or employees, sorry, that expense will not be reimbursed, because the idea is the CRA wants to promote you to do the R&D within Canada, and that's why they differentiate.

Jason Pereira: Excellent. Well, I mean, it makes perfect sense. I mean, the bottom line is that most government programs are typically focused on benefiting those who are actual residents, so it makes perfect sense. Okay, so, perfect. So talk to me, what's involved in this process? Because, you know, it's clearly, it's government, there's going to be bureaucracy, administration, and especially with the stakes as high as they are here, with the numbers we're talking about, like, there's going to be a fairly high bar for this stuff. So what's involved in applying for these things?

Vipul: Yeah, so let me walk you through how the process is and what is involved. So let me cover one of the things that, you know, a business owner needs to consider. So first, one of the key principles that must be involved in your work is the use of a scientific process. What I mean by that is, the way you worked should involve formulation of a hypothesis, testing the hypothesis, and arriving at a conclusion. If your work regularly employs that, then you become eligible. And the beauty is, you don't have to succeed. Even if you failed, you're totally eligible for SR&ED credits, and I've applied for clients who didn't succeed. They used this process, everything was refunded, no problem. So that's one thing to keep in mind.

Vipul: Now the process, I'll give you an example of how I worked with a client, right from when they approach somebody like me to the point they get the refund. So that's a four-step process, so I'll walk you through what it involves and the timeline. So step one, let's say you have an assessment, to see if your work is actually eligible for SR&ED. So we discuss with the lead engineer or a CTO, just to find out what sort of projects you're doing and are you eligible. Next comes information gathering. There's two parts to it, technical information and financial information. So technical information is, okay, the work that you're doing, the projects you're involved in. Each project is determined separately, so there might be some work a startup does that is not eligible for SR&ED. That's okay, we just take the projects that are applicable, put a write-up, and then use the financial information against it. Imagine one employee is working on three projects. Two of them are routine quality testing, market research, but one is SR&ED. That portion of that expense can still be claimed. So that is the technical information gathered. Then you prepare a SR&ED documentation review as per the CRA, and then the final step is you submit the forms to claim those refunds. This is what's involved from actually starting to the end of submitting a claim to the CRA.

Jason Pereira: Okay, excellent. All right, so that's it. So talk to me, all right, so that's clear. Now, most business owners are going to start off having no idea where to turn. This is where SR&ED consultancy comes in. So talk to me about the process that you put in place that basically helps people understand what applies for SR&ED, what they can apply for SR&ED with, and helps them get across the finish line on that.

Vipul: Fantastic. So first I'll give you an idea of what the timelines are. A lot of startups think, oh, like, I did SR&ED work last year, can I claim it? I've already filed my T2s. So you have up to 18 months from the end of your tax year to file a SR&ED claim. So imagine you did SR&ED work as of 31st December, 2021. You still have time until 30th June, 2023 to file. So keep in mind, when your tax year ends, you still have 18 months to file the claim, and you can file it with your T2 return.

Vipul: Now, how does a typical process work, like, from end to end, to help people apply for SR&ED? So it usually takes anywhere from four to six weeks, assuming you have two to three projects. Let's say your claim is up to a hundred thousand, this is how long it should take. But what's the process? So usually how I work is, I first have a call, either with one of the co-founders who are involved, and we do an assessment call, around 40 to 45 minutes, finding out, is your work actually eligible? Because sometimes owners don't even know, like, oh, is this eligible? What sort of documents should I maintain? So we walk them through that. So it depends on two things. One, if you've already finished your tax year, then we start beginning the process of collecting information from you. And if you're within your tax year, we talk to you about how can you maintain every evidence and document stuff so that you're good at the end of the year to claim. So that's step one, depending where you are.

Vipul: Next, it takes two to three weeks to gather the technical information, so what sort of R&D you're doing, depending on your field. Let's say you're working in computers and information technology, it might be a lead developer or your lead CTO, we work with that. If it is, you know, biotech or something, you'll have your researcher. They're talking to one of my experts who take the information on what work they've done during the year and write it down in the way the CRA wants. Then we look at your financial information. Okay, what money did you spend? The salaries, the subcontractors, the overheads related to these, all of that is accumulated, and then the claim is prepared. That takes about a week to two weeks, and finally we send it for review to the client, just to see, you know, does all of this make sense? Usually they rely on our judgment, we try to maximize the claim. So the same time, the process takes about five weeks, and then finally it takes about a week to submit the claim. We submit it ourselves, or sometimes clients already have their accountants, we work with them, file the claim.

Vipul: And one last thing most of my clients ask is, okay, how fast will I get my money? So the CRA currently is promising a timeline of 90% of claims will be processed within two months, assuming you're not audited. I filed claims recently for three clients in the last couple of months. Everybody got their refund within 60 days, 100%, because they weren't audited. We did a good job of explaining what they were doing. But, you know, sometimes you get audited, and in my experience, every five to seven years you're likely, they'll pick you up for audit, and that can take up to 180 days to get you that refund. But usually it's pretty good. But if you're audited, sometimes, you know, the claim can get reduced, because, you know, it's still the CRA. But it's pretty generous, they want you to do R&D. Refunds, if the claim is well made and, talking conservatively, you have good evidence, you can get your money in 60 days, and then you can use it for literally whatever you want, like invest in the business, build a Jacuzzi if you want. Technically there's nothing stopping you from using that money.

Jason Pereira: Well, I mean, yeah, it's like, you spent the money already, you're getting money back, you can use it for whatever you want, right? It's the fact you spent the money in the first place. So whether the refund buys a Jacuzzi or not is not the issue.

Vipul: So the reason, that's what startups think, oh, now do I have to spend it again on R&D, or can I spend it on, let's say, promotion, on, you know, Google Ads? Like, you can still do that. It's not a grant where it's earmarked towards something. It is a refund based on money spent. So it makes perfect sense. So yeah, it lets you hire, like, if you think you have a budget of 60,000, you could technically hire somebody for 100K, get 60 back, so your net cost is 40K.

Jason Pereira: Well, and frankly, I know many organizations where basically they've already factored it in as a line item on their revenue. They know they qualify, they're experienced, they've done these forms before, and when they're costing out a project, they're literally costing it out and knocking 60 points off of labor because they know, it's just really, they've got to float the entire thing. So yeah, that's the great thing, is, yes, whereas we're talking about it being a refund, and therefore it doesn't actually, you know, have to go towards labor, the reality is that if you're smart about it, you think of that money coming in first, and you basically float it on debt if you have to. It just depends on what you're doing. So it accelerates your R&D cycle. Okay, so talk to me about where the misconceptions of this program are. I mean, I'm sure, you know, something this lucrative is going to attract people that basically are just trying to say, okay, like, yeah, I totally want 60% off. You know, where are the big ones? Besides the obvious things, when you explain, no, sir, you cannot just have your regular secretary and all your other labor that does no R&D basically covered, what other surprises do people find when they're looking at this sort of thing?

Vipul: Yeah, one of the biggest ones I see is they don't maintain good evidence. Like, you would have done the work, and you're like, yeah, but it's all in my mind, you know, we didn't write the notes, like, we don't need it, we are a startup, right? Startups don't need to maintain evidence. Well, the CRA is giving you a lot of money. Like, treat the CRA, imagine if somebody's giving you 60% of your expense back, treat them like a high-value client. So do maintain good evidence. Even though you don't have to submit that evidence to the CRA, if an audit comes, you have to prove it. And if you're like, oh, it's in my mind, I had the calls, like, how do you prove it? So yeah, that's one of the biggest problems.

Jason Pereira: I'll say, if you're a startup, and especially if you're going for funding, treat it like they are basically a venture capitalist. You have to show the work you've done at different stages.

Vipul: That's a wonderful way of putting it. Yeah, like, treat them like either a high-value client or a venture capitalist. Meet their requirements, and they will reward somebody who meets these requirements. Then number two, some of the founders, they're like, oh, I've been involved working all my time in the startup, I can claim my salary, or sorry, I can claim the money I'm paying myself, right? There's a catch there, that you can't pay yourself as a contractor if you own more than 10% of the shares of the company. So to save some of the CPP or EI, a lot of founders pay themselves as contractors rather than salary. You become totally ineligible. So it is worth, like, paying yourself a salary. Even though you might find it a little higher, you will get a good portion of it refunded. So a lot of them think, oh yeah, founders, two of us working hard, we get, you know, 70 to 60% back. Well, you paid yourselves as contractors, zero dollars will come back. So that's where they sometimes miss out as well.

Vipul: So these are the two big things I've seen, and then the third one is, like, they say, oh, look, I have this innovative website or app that I'm doing, and then I'm like, yes, it's new for you, but it's still publicly available. Just because you thought that was technological uncertainty, and you couldn't afford to pay a, you know, big developer, that doesn't count. Like, it should actually be a technological uncertainty for the public, not just for you. So sometimes I have to reject some clients who feel like, oh, but, you know, I didn't know how to do this. But that doesn't matter. Like, you should advance science and technology, not just your knowledge. So that can also make you ineligible for SR&ED.

Jason Pereira: So, okay, so basically, we've gone over this. Now, talk about what the audit process looks like, right? Like, you know, that word scares people. What does it look like when CRA says, okay, yeah, show us, or back up what you've told us in the past?

Vipul: Yeah, so the audit, just because you have an audit doesn't mean the CRA doesn't trust you. It's called the normal function of actual tax law. You basically...

Jason Pereira: Let's trust but verify.

Vipul: Exactly. So a small percentage of, you know, claims will always get audited. So when this audit comes in, step one, like, if you get your refund within 60 days, that means you haven't been audited, you get your money, best case scenario. People want that to happen. But now you've been audited, right? They'll ask you to now provide proof for two things, which are part of it. One is the technical information of the work you've done, and number two, justify the costs, because that is what determines your SR&ED eligibility.

Vipul: So let's talk about the technical information. Here they want to see evidence of SR&ED. So let's say you're saying, oh, we are doing this, there is this technological uncertainty in our field, and we're trying to solve it. Okay, what's the proof? Do you have, say, timesheets? Do you have some sort of meeting notes? Do you have prototypes? Do you have Git history? Like, what is the evidence to say that, you know, I am claiming salaries for three people for SR&ED? Okay, what work did they do? It might be emails, it might be meeting notes. All of those are valid evidence, but you have to have something. You can't be like, oh, we just meet, and here's the final product. Well, if you're claiming six months worth of salaries, show me six months worth of work. So the more evidence you have, the CRA loves it. That shows, oh, you know what, you're actually doing this. You're going back and forth, you have a hypothesis, you're succeeding, you're failing. That's okay, but you have a scientific process. So that's the biggest chunk, on the field to prove what technical work you did and how do you prove it.

Vipul: Now, part two is the financial part. Okay, if you're claiming these salaries, show us the pay stubs, show us the T4s. And if you have a contractor, you have a statement of work showing that, you know, this is the SR&ED-related work they've done, this is where they were employed, you know, that the contractor is in Canada. Show some sort of invoices, whether they're charging you HST or not, things like that, to verify the expenses you're claiming. So if you have, like, good evidence for both of these, you might go a little bit back and forth with the CRA, and if the evidence is good, usually it can pass through. But in my experience, I've seen claims come down anywhere from 20 to 40 percent, because, you know, they'll say, you know, over one month we didn't have enough meeting notes, and, you know, unfortunately that month's salary will be gone.

Jason Pereira: Excellent. So, okay, so basically, when people don't know where to start, talk to me about where to get started, besides coming to someone like you. I mean, what's the first, if they're missing this podcast, right, what are the things they should be thinking about if they say, you know what, this might apply to me?

Vipul: Yeah, okay, so there are these key questions you have to ask yourself. Firstly, qualifying SR&ED-related work. Are you doing something with technological uncertainty, and the information is not publicly available? If you can definitely say yes, you are likely to be eligible. Next, look at what sort of work you've done throughout the year and see, are you maintaining sufficient evidence? It's okay if you haven't. Go back, make sure you're recording meeting minutes or notes or emails, and keep capturing them in real time, because by the time audit season comes, imagine you have to go back 12 months ago and trying to find out, what did I do 12 months ago with my employees? You're unlikely to have it. So get into the habit, you know, once every couple of weeks, just to maintain evidence. Put it in a folder, keep all your emails, meeting minutes, notes, whatever. So do these at the end of the year.

Vipul: So you have two ways to do it, right? Basically file it yourself, or you hire somebody like me, or if your accountant is good enough to do it, do that. To file it yourself, you need to be able to answer, there are three key questions the CRA asks, which is in the SR&ED form, where you have to define what technological uncertainty you had, so you explain that, how did you approach it, and then finally, what conclusions you arrived at. If you can articulate these, that's, I'll be honest, that's more than 50% of the work. If you're good at it, I've seen some clients managing to do that bit, and if you're good at it, you can do it yourself. However, the problem comes when it comes to the financial information and the amount to claim, because sometimes clients don't claim enough. There are a few different calculations, but if you have all your pay stubs and everything in order, the CRA form, like, it will automatically calculate what your refund is and give you an idea. So you can theoretically still do it, but it wouldn't hurt just having a call with some sort of an expert who does it. Because they may charge, say, the fees range anywhere from 10 to 20 percent, but somebody can maximize your claim, and they are only being paid on a success fee. Most startups I've seen have found it totally worth spending that, because it saves you so much time, they take care of all your work, and, like, they are only paid if they succeed, so they are interested in you maximizing your claim. So follow these steps, and if you are not okay, or don't know enough about the financial portion, like, use an expert. It's totally worth, you know, maximizing.

Jason Pereira: Nice one. All right, Vipul, thank you so much for your time today. Very much appreciate this walkthrough. This is, I've been trying to get someone on here for a while, so I'm glad someone finally came on and told me about this. So where can people find you?

Vipul: Well, they can find me on my website, with my name, that's .ca. You have my phone number, email, I'm giving it on there. Feel free to contact me, like, even if you just want a free consultation. I've done it for many clients, I'll just give you an idea. You can at least learn more about SR&ED, any other tax-related stuff.

Jason Pereira: Excellent. Thank you so much.

Jason Pereira: So that was today's episode with Vipul Jain about SR&ED credits. Hope you enjoyed that, and if you do qualify for them, what are you waiting for? Honestly, this is one of the more lucrative programs I've ever seen, or that Canada's ever created, and also, I would say, targeted in the right direction, in my opinion. But that said, as always, if you enjoyed this podcast, please leave a review on Apple Podcasts, SoundCloud, Stitcher, Spotify, or wherever you get your podcasts. Until next time, take care.

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