Tax Question:
What is the difference between filing a Scientific Research & Experimental Development (SR&ED) claim under the traditional or proxy method?
Facts:
When preparing a SR&ED claim, you have the option of filing using the traditional or proxy method to claim overhead or other expenses and support staff.
Overhead and other expenses for purposes of SR&ED are defined as expenses of a current nature that are either directly attributable to the prosecution of SR&ED in Canada or directly attributable to the provision of premises, facilities or equipment for the prosecution of SR&ED in Canada. To be directly attributable, the expense must be directly related to the SR&ED work and would not have occurred without the SR&ED work.
For example, materials that are not normally considered research materials, even regular office supplies incorporated in your SR&ED or used by the staff undertaking the research; or power used to run your prototype; or support staff that is not doing research but is supporting researchers.
Traditional Method: Overhead and other expenses are specifically identified and claimed on the SR&ED return. For example, including staff who support or supervise the SR&ED work but aren’t directly engaged in SR&ED.
For example, data entry support and shop floor supervisors. This requires detailed record-keeping and justification and also proration of many expenses that are shared.
Proxy method: The salaries of those directly engaged in SR&ED work are grossed up by 55% (the proxy) in lieu of claiming overhead and other expenses and staff who aren’t directly engaged (support staff). This is a simpler way of filing.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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