The Scientific Research and Experimental Development (SR&ED) Tax Credit Program
R&D Tax Credit Program is Open to All Types of Businesses
Research and Development (R&D) is not only good for Canadian businesses generally, but a good thing for individual businesses to be involved in.
Our federal government has many programs devoted to encouraging innovation, meaning that a lot of funding is accessible through R&D. One of the best of these programs is the SR&ED (Scientific Research and Experimental Development) Tax Credit Program.
Think that you have to have a PhD and a state-of-the-art lab to be involved in R&D?
Think again. R&D activities can be integrated with your daily business activities.
And the SR&ED tax credit program is a great deal. "Generally, a Canadian-controlled private corporation (CCPC) can earn an investment tax credit (ITC) of 35 percent up to the first $3 million of qualified expenditures for SR&ED carried out in Canada, and 20 percent on any excess amount. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC of 20 percent of qualified expenditures for SR&ED carried out in Canada" ( Canada Revenue Agency).
This is a refundable tax credit, which means that even if your business makes no profit, you will get the appropriate refund back in cash.
Besides the eligibility for these investment tax credits, R&D tax incentives provide a full tax deduction in the year the expenditures are incurred, even if they are capital in nature. You can also carry over R&D deductions to the extent that they are not needed in the current tax year.
Because of the generous ITC rates and related R&D tax incentives, going to the trouble of preparing an R&D tax claim is definitely worth it!
Who & What Qualifies for R&D Tax Incentives
The first point to note is that these SR&ED tax credits are open to all types of businesses. Sole proprietors and partnerships may qualify, too, as long as they meet the SR&ED project requirements.
To qualify for the SR&ED program, says the CRA, "work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel." They list work that qualifies for SR&ED tax credits as including experimental development, applied research, basic research and support work. (They also provide a list of examples of work that will NOT qualify for SR&ED tax credits.)
It sounds difficult and "high-falutin", but don't let that put you off. When planning your R&D project, you need to be sure that you’re working towards something that is truly new and not information that is common knowledge at the time. The scientific or technological uncertainty is a condition of the process, just as in your high-school science class experiments. And you would, of course, perform your R&D activities in an orderly fashion and fully document your activities, just as you would with any work you perform.
Note too that your R&D activities do not have to be successful to qualify for the SR&ED program. Again, just like your high-school science class experiments, it's the process that's important.
Perhaps best of all, the SR&ED tax incentives program is not a “prepare a proposal for your project and wait to see if it gets approved” type of program.
You can just design and carry out your project (bearing all the above qualifying caveats in mind) and then make your tax claim (by completing Form T661, Claim for Scientific Research and Experimental Development (SR&ED) in Canada, and the appropriate Investment Tax Credit schedule and submitting them as part of your income tax filing.) For further filing information see How to File a SR&ED Claim.
The fact that most provincial governments also provide R&D tax incentives is another great reason to get involved in R&D. For instance, Ontario has a Deduction for Federal R&D Investment Tax Credit permitting a deduction from Ontario taxable income for work that qualifies for the federal ITC claimed in the preceding taxation year. (This deduction is limited to the part of the federal ITC that can reasonably be considered to relate to Ontario R&D expenditures.) And that’s just one example.
(Note that some provincial R&D tax incentives only apply to corporations, unlike the federal SR&ED tax credit program.)
You Don't Have to be in High-Tech to be involved in R&D
R&D tax incentives aren't just for high-tech businesses; you may even already be doing something that will qualify for the SR&ED tax credits program. For instance:
- Are you in the process of developing a new product or making improvements to an existing product?
- Are you creating an improved manufacturing technique or process?
- Are you spending money to lessen the environmental impact of your manufacturing process?
- Has your business developed new software?
When thinking of R&D activities and wondering what qualifies for R&D tax benefits and what doesn't, remember that "generally, R&D occurs when a business's objective is technological advancement, development occurs in a systematic manner through the efforts of individuals who are skilled in the technologies involved and technological uncertainties are overcome." (The Tax Benefits of R&D; BDO Dunwoody Tax Bulletin).
Tips for Accessing Even More R&D Funding
The Industrial Research Assistance Program (IRAP), run by the National Research Council of Canada (NRC) offers two kinds of financial assistance for R&D activities, including “non-repayable contributions to Canadian SMEs interested in growing by using technology to commercialize services, products and processes in Canadian and international markets”. To find out more, contact an Industrial Technology Advisor (ITA) at the IRAP regional office nearest to you.
The BDC (Business Development Bank of Canada) can be of great help in accessing R&D programs and working through the process of applying for government grants and R&D tax credits.
There are businesses who specialize in helping other companies maximize their R&D tax credits and work through the claim process (for a fee). Technology Incentives and Innovation Technology Consultants are two companies that specialize in SR&ED claims. (There are many others.)
For More Information on the SR&ED Tax Credit Program
See the CRA’s Claiming SR&ED tax incentives for an outline of who qualifies for the program and the SR&ED claims procedure.
The Tax Benefits of R&D (BDO Dunwoody LLP) provides a very readable detailed explanation of the R&D tax benefits available and how to maximize your R&D claim.