Scientific Research and Experimental Development (SR&ED) of new products are the lifeblood of many Canadian companies. However, not all companies feel they have the resources required to commit to research.
The Canadian government encourages businesses and entrepreneurs to tap into their innovative side to help stimulate the Canadian economy. They provide incentives to help companies be better prepared to invest in product development. Their support is not just for Canadian companies, but also to incentivize foreign companies to choose to perform their research and development in Canada.
Canada’s commitment to research and development is most evident in its SR&ED tax benefits, which offer strong incentives for businesses to pursue product development in Canada. Many businesses, however, are unaware of the incentive offered by the government, although Canadian tax benefits are one of the most lucrative tax incentives in the world. Any business and facility can look at development opportunities by applying for the Canadian SR&ED incentives.
What does the Canadian Government consider SR&ED?
Canada views initiatives that would fall under SR&ED as projects that systematically investigate or research development for science or technology through experiment or analysis. This applies to businesses whose main focus includes the technological advancement of products. Development in this industry depends on a systematic method to explore new technologies and overcome challenges presented by technological uncertainties.
What projects are eligible for the SR&ED tax benefit?
If you are interested in applying for Canada’s SR&ED incentive, you will need to prove your project meets the criteria. If you can answer yes to any of the following questions, you are most likely eligible for the incentive:
- Is your project focused on scientific or technological uncertainty?
- Does the project require formulating hypotheses to reduce or eliminate those uncertainties?
- Do you need to develop a systematic investigation or search method or approach, such as formulating and testing your hypotheses using experiments or analysis?
- Are you attempting to achieve a scientific or technological advancement through your methods?
- Were records kept to show your progress and results?
The government does not necessarily look at each question individually but instead will assess your overall project and apply the questions to your entire body of work.
What are Canada’s SR&ED tax incentives?
Canada offers 3 benefits for qualifying SR&ED expenditures:
- A full tax deduction for the years your company incurs related expenditures
- The allowance for companies to “pool” SR&ED expenditures in order to carry deductions to a year when they are needed
- Investment tax credits (ITCs) can be refunded in cash in the instances you won’t require them to reduce your current payable taxes
Most companies are interested in the ITC on qualifying expenditures. This is because it works well for Canadian-controlled private corporations (CCPCs) that perform SR&ED activities that qualify for the tax incentives.
How do the SR&ED tax incentives work?
Businesses can claim a non-refundable tax credit equal to 15% of eligible expenditures for federal taxes. When it comes to CCPCs, credits can reach up to 35% and can be refundable. This applies to the first $3,000,000 of eligible expenses incurred by the CCPC.
Once a company’s prior year taxable income exceeds $500,000 or taxable capital employed in Canada exceeds $10 million, this option phases out and is eliminated once the prior year’s taxable income exceeds $800,000 or taxable capital reaches $50 million.
There are also provincial tax incentives available that vary from location to location and for commercial development. It’s worth looking into what options are available in your province or to compare incentives from each province if you have not yet chosen a location for your business. This will allow you to take advantage of the best incentives available.
How to Apply for Canadian SR&ED Tax Incentives
The reporting deadline for corporations is 18 months from the end of the tax year your expenditures were incurred. You must file the applicable forms to apply for SR&ED tax incentives prior to this deadline.
All forms must be completed correctly with the required information within the timeframe, as the government does not allow companies to include pooled deductibles for SR&ED expenditures after the fact. As well, if everything is not provided by your deadline, you won’t be allowed to claim an ITC on these expenditures.
How to Qualify for SR&ED Tax Incentives
According to the Canadian Revenue Agency, they are committed to helping eligible companies have access to the programs available. They are careful to process SR&ED claims to ensure they provide the applicable incentives to companies that qualify.
As with all tax processing, companies might be randomly selected for a more thorough review. Because the process can be confusing, they also offer a First-Time Claimant Advisory Service.
However, the service will contact any first-time claimants to provide further information on how the program works, to make it easier for them to file subsequent claims.
This can include technical and/or financial reviews relevant to a company’s specific descriptions submitted. In most cases, the service will provide detailed information for both aspects of a claim.
If you would learn more about the benefits of conducting research and development in Canada, call AMSaxum at 905-315-6847 or contact us here.