CEWS and SR&ED – Guidance from the CRA
Updated to Reflect New Policies (2022)*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. *** |
The Canada Revenue Agency (CRA) recently released detailed guidance on how the Canada emergency wage subsidy (CEWS) affects scientific research and experimental development (SR&ED) investment tax credit (ITC) claims. CEWS is one of many COVID-19 support programs available, designed to allow employers to rehire employees or retain them during the economic hard times due to COVID-19. The biggest takeaway is that CEWS is considered government assistance and should be treated as such. This post will explain the guidance in further detail.
How does government assistance affect SR&ED?
Government assistance reduces the pool of eligible SR&ED expenditures. The CRA further explains:
In calculating the investment tax credit (ITC), government assistance that can reasonably be considered in respect of SR&ED reduces the qualified SR&ED expenditures, if the taxpayer, on or before the filing due date for the tax year:
- received the assistance
- is entitled to receive it
- can reasonably be expected to receive it1
If the reduction required is more than the eligible expenditures, the excess is considered income for the year.2
Do you have to reduce your expenditures by the entire amount of CEWS received?
Not necessarily! According to the CRA:
The CEWS received or receivable for an expenditure of a taxpayer that may be a qualified SR&ED expenditure is considered assistance in respect of SR&ED. In determining the qualified SR&ED expenditures for an ITC, using the proxy method or the traditional method, you have to calculate the CEWS amount received or receivable for directly attributable salary and wages which includes directly engaged salary and wages.3
This means that the amount of CEWS received should be treated similarly to salary and wages and the portion attributable to directly engaged salary and wages should be claimed as government assistance in your SR&ED claim.
Below are two examples of how to apply CEWS and other COVID-19 funding such as the Temporary Wage Subsidy (TWS).
Example 1: employees are 100% SR&ED eligible
Below is an example of CEWS and ITC assuming that 75% ($847/week maximum for periods 1-4) of all eligible salaries were paid for by CEWS in the tax year.
- Your Ontario-based company has five employees doing 100% SR&ED eligible work. They are paid $100,000 each ($500,000 total) annually.
- You accept CEWS for them ($847/week for periods 1-4) 847 x 5 = $4,235/week. $4,235 x 16 weeks = $67,760.
- The way calculation works is that your expenses will be $775,000 (base salary + 55% proxy*).
- When CEWS is deducted, this amount becomes $707,240.
- Provincial amounts are then deducted (just the way the calculation works) which moves the total amount on which the tax credit is calculated down, to ~$627,888.
- Your tax credits are then calculated on the ~$627,888.
- The refund will be $299,113 (refundable + non refundable).
- The total value of CEWS ($67,760) + SRED ($299,113) is $366,873. (Yes, the math is correct!)
| SR&ED Expenditures | |
|---|---|
| Employee Salaries | $500,000 |
| Total Allowable SR&ED Expenditures (Line 400) | $500,000 |
| Subtotal - Additions | $275,000 |
| Deductions | |
| Government Assistance (ex. CEWS) | $67,760 |
| (subtract) Total Provincial Assistance (automatically calculated) | $79,352 |
| (equals) Qualified expenditures for ITC purposes (Line 570) | $627,888 |
| Breakdown of Tax Credits | |
| Federal ITC - Refundable | $219,761 |
| Federal ITC - Non-Refundable | 0 |
| Provincial Assistance - Refundable | $56,579 |
| Provincial Assistance - Non-Refundable | $22,773 |
| Estimated Refund | |
| Total Tax Credits - Refundable | $276,340 |
| Total Tax Credits - Non-Refundable | $22,773 |
| Total Tax Credits including Non-Refundable | $299,113 |
| Total Government Funding (CEWS+ITC) | $366,873 |
In this example, while CEWS reduced the total ITC, it is beneficial to take government assistance. Please see our post Government Support Doesn’t Mean Less Government Funding for more details on why taking government funding and a reduced ITC will benefit your company in the long run.
Example 2: employees are 50% SR&ED eligible
Below is an example of CEWS and ITC assuming that 75% ($847/week maximum for periods 1-4) of all eligible salaries were paid for by CEWS in the tax year.
- Your Ontario-based company has five employees working on SR&ED eligible work. Four employees are working 100% on SR&ED and one employee doing 50% SR&ED eligible work. They are paid $100,00 each ($500,000) annually. The total wages which are SR&ED eligible are $450,000 ($400,000 + $50,000).
- You accept CEWS for them ($847/week for periods 1-4) 847 x 5 = $4,235/week. $4,235 x 16 weeks = $67,760.
- Because one employee is only working 50% on SR&ED the amount CEWS included as government assistance is $60,984 ($847 x 4 = $3,388 PLUS $847 x 50% = $423.5) ($3,811.50 x 16 weeks = $60,984)
- The way calculation works is that your expenses will be $697,500 (base salary + 55% proxy*).
- When CEWS is deducted, this amount becomes $636,516.
- Provincial amounts are then deducted (just the way the calculation works) which moves the total amount on which the tax credit is calculated down, to ~$565,099.
- Your tax credits are then calculated on the ~$565,099.
- The refund will be $269,202 (refundable + non refundable).
- The total value of CEWS ($60,984) + SRED ($269,202) is $330,186. (Yes, the math is correct!)
| SR&ED Expenditures | |
|---|---|
| Employee Salaries | $450,000 |
| Total Allowable SR&ED Expenditures (Line 400) | $450,000 |
| Subtotal - Additions | $247,500 |
| Deductions | |
| Government Assistance (ex. CEWS) | $60,984 |
| (subtract) Total Provincial Assistance (automatically calculated) | $71,417 |
| (equals) Qualified expenditures for ITC purposes (Line 570) | $565,099 |
| Breakdown of Tax Credits | |
| Federal ITC - Refundable | $197,785 |
| Federal ITC - Non-Refundable | 0 |
| Provincial Assistance - Refundable | $50,921 |
| Provincial Assistance - Non-Refundable | $20,496 |
| Estimated Refund | |
| Total Tax Credits - Refundable | $248,706 |
| Total Tax Credits - Non-Refundable | $20,496 |
| Total Tax Credits including Non-Refundable | $269,202 |
| Total Government Funding (CEWS+ITC) | $330,186 |
This example illustrates how to apply CEWS when an employee is not spending 100% of their time conducting SR&ED eligible work.
Conclusion
While we have been treating CEWS and TWS as government assistance since it was released, it is reassuring to receive guidance from the CRA on how they explicitly want it to be applied to SR&ED ITCs. If you are unsure of how to apply your government assistance to your SR&ED claim, please speak with your SR&ED consultant and/or tax advisor. Please see our previous post on CEWS – CEWS and SR&ED – What you need to know, as well as, Government Support Doesn’t Mean Less Government Funding for more information on how government assistance impacts SR&ED claims.