In a closely held/small business, oftentimes the owners are the main workers. If the activities of this company are SR&ED eligible, then how the owners get paid can make a dramatic difference in how much money can be received through SR&ED. Therefore, if you are an owner-operator of a business with SR&ED eligible work, make sure that your tax adviser is also a SR&ED expert so that all of the ramifications are considered prior to making a decision on your compensation strategies.
Let’s compare some common owner-manager compensation structures and see how they impact the company’s SR&ED claim.
Subcontractors vs. Dividends vs. Salaries
An owner-manager can only be a non-arm’s-length contractor; it disqualifies any SR&ED claim on such a subcontract expense. CRA is unfavorable of owners paying themselves as subcontractors, so it is better to choose paying yourself in other ways than as a subcontractor if your business is eligible for SR&ED.
When a specified employee – i.e. an owner/manager – receives a large dividend payment, this can have a huge impact on the SR&ED expenditures and tax credits. Simply stated, dividends are not an eligible SR&ED expenditure. If the owner-manager is performing SR&ED work, any dividends or return of capital paid will not generate SR&ED ITCs.
The same rule applies to year-end bonuses, management fees, sweat equity and commission.
An owner/manager directly involved in execution of SR&ED projects should be paid a salary just like any other employee of the company. The SR&ED amount received on salaries is more than any other category of SR&ED expense. As such, a salary is the best way to get the most from the SR&ED program. We also recommend that owner/manager technical staff receive as high a salary as possible subject to the reasonable limit of the fair market value of their services.
“We look at planning taxes of the company in conjunction with planning for personal taxes of its owners in order to maximize gain from the SR&ED program. We call it the ‘SR&ED Directed-Tax Plan’,” says Vijay Kalra, CEO of SR&ED Funding Consultants Inc. (SFC).
Give us a free call at 1-888-418-7733 and learn more about the “SR&ED-Directed Tax Plan”.