To develop new technology is to invite failure. But software companies don’t have to absorb every penny spent on discarded prototypes, algorithmic dead ends and hefty research salaries.

Properly claimed, the Scientific Research and Experimental Development
(SR & ED) program can give some of those dollars back. Last year, the Canadian Revenue Agency handled more than 18,000 claims and doled out over $3 billion in refunds.

The SR&ED program encourages Canadian businesses to develop or improve products and processes. As long as R&D is conducted in-country, Canadian-controlled private corporations, partnerships and sole proprietorships are eligible for refunds. Applicants can enjoy up to a 68 per cent refund in salaries, 41 per cent on materials and 17 per cent on research-related capital expenditures.

Many startups and medium-sized companies are familiar with the program, in part thanks to the free, monthly how-to sessions hosted by the CRA. But navigating the bureaucratic maze can be onerous, time consuming and confusing. Do-it-yourselfers can expect months of distraction from their primary business.

What we do is take on the role of detectives. We look for a trail of crumbs, so to speak. Sometimes companies have good records, sometimes they don’t,” says Neilson. “Our job is to build a case and describe why (the process) was a technical challenge and why it was an uncertainty,” he says from his Ottawa office.
“A common mistake that people make is having too much pride. In a discovery process a government representative will often ask the project manager or engineer if they knew their particular process would work.”

Neilson, who handles about three claims a month, explains. “A lot of times, these people will puff out their chests and say, ‘yes, of course.’ Well, that’s not the answer they want to hear.” Through preparation and coaching, consultants can help make sure that pride doesn’t come at the expense of profits.

Feeding your employees a slice of humble pie may help them celebrate technical failures, but changing the way company’s owners get paid will be anything but a cake-walk.

When it comes to payday, many owners choose to cash in only when the going is good, taking their pay straight from the company’s coffers. Sacrificing a cheque for the good of the company may seem like good financial sense, but it could end up costing you thousands of dollars.

According to Martha Oner, business development manager with OME Group Consultants, employees that own more than 10 per cent of the company should get regular paycheques and T4 slips in order to secure refunds on labour dollars. “Random monthly draws, amounts based on quarterly profits or T4As are not eligible expenses for the SR & ED program and will end up being excluded from the SR & ED pot.”

A consultant can help you to track down the specific time these employees spend on eligible work, giving you more time to concentrate on your business.

Consultants can also unlock expenses that are often overlooked, such as overhead costs. “Proxy method is used when salaries are large for directly engaged employees and there has been little time spend on support activities,” Oner explains.

Neilson uses the example of a software engineer who spends all their time engaged in SR & ED work, at a salary of $100,000 a year. The engineer needs an office, computer and phone, all of which can qualify for refunds with a skilled consultant. “It could work out that the $100,000 salary of someone who works in research and development gets bumped up by 65 per cent. So, it becomes $165,000 that’s now eligible for your tax credit,” explains Neilson.
But SR & ED claims for overhead expenses don’t have to be immediately tied into your work. “A traditional method (of overhead calculation) should be used if significant work relating to SR & ED projects has been done in the areas of long-term forecasting, HR staffing, contract administration, technical training and clerical support of SR&ED projects,” adds Oner, whose company processes around 300 claims a year.

Andrew Muroff, COO of Toronto-based 80/20 Solutions received $32,000—100 per cent of his first claim- in 2005, with OME’s help. “We tried to keep our books up-to-date, but in terms of tracking time spent on SR & ED tasks, we weren’t very specific,” he says. 80/20, which develops platforms for interactive marketing, now tracks the work of their employees with SR & ED claims in mind and Muroff says filing his 2006 claim was much easier.

Even so, Muroff isn’t quite ready to go it alone. “We learned a lot about what’s applicable and how to track time spent,” he explains. “But any company should use a consulting group for their first few times. There’s a lot of technicalities and I think the professionals know how to handle it best.”

New development and research will always court failure, but they don’t have to wed a startup to bankruptcy.