Research & Development Tax Credits

ST000652Research and Development income tax credits are significant income tax credits that result in large tax refunds and are surprisingly available to many small businesses like yours!

The traditional image that often comes to mind when the term “research and development” is mentioned is one of scientists in lab coats working in laboratories to create new inventions.

More and more small businesses have recently discovered that Canada Revenue Agency considers a much broader range of activity to be eligible for their Scientific Research and Experimental Development (“SR&ED”) tax incentive programs. For example, farmers, manufacturers, fabricators and other non-traditional researchers are qualifying under the Canada Revenue Agency program. In some cases, applicants can receive income tax benefits equal to nearly 70% for their research and development expenditures!

The Scientific Research and Experimental Development program is a federal tax incentive program that encourages Canadian businesses to conduct research and development in Canada.  The program provides businesses cash refunds and/or tax credits for their expenditures on eligible work done in Canada.  Privately held companies, as well as publicly listed companies engage us to assist them in the analysis and documentation of SR&ED.  Our staff has an in-depth knowledge of the SR& ED program, its review process and requirements and we can assist you through the filing process quickly and effectively.The SR&ED program provides investment tax credits (“ITCs”) calculated as a percentage of amounts expended on SR&ED.

Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable ITC of 35%, 100% refundable on qualified SR&ED current expenditures and 40% refundable on qualified SR&ED capital expenditures, up to a maximum threshold of $3 million of qualified SR&ED expenditure for SR&ED carried out in Canada.  A CCPC can also earn a 20% non-refundable ITC on any amount over that threshold.  However, for a CCPC that meets the definition of a qualifying corporation, the 20% ITC on any amount over that threshold is refundable, 40% refundable on qualified SR&ED current and capital expenditures.

Salaries, materials, consulting, related overhead SR&ED expenses and some capital assets used or consumed in the SR&ED activity can be included in the R & D claim. A specific formula allows a certain percentage of “overheads” incurred by the business to be included in the claim.  In business operations where employee labour is a significant component of the SR&ED expenditures, this alternative can provide compelling financial advantages while reducing administrative time and effort.

There has been much written by the Canada Revenue Agency about what activities and expenditures qualify in specific industries. In most situations, to be eligible for the SR&ED claim, the project must involve research to advance knowledge or include experimentation to achieve technological advancement in products or processes. This can have a broad interpretation, and the expenses of developing new products or methods of manufacturing may qualify.

Over the past few years, Canada Revenue Agency has made significant strides in its approach to the SR&ED program. Many additional services and resources have been made available to potential claimants to educate them about the program and provide them with a much better chance of qualifying for the potential income tax benefits. Recently Canada Revenue Agency has improved their systems so that claims are being reviewed and assessments issued faster than before.

The filing deadline for a SR&ED claim is 18 months from the end of the taxation year, but this depends upon your business. It is possible to go back to the preceding taxation year and amend a corporate income tax return previously filed. This provides the opportunity for the first time claimant to recover a prior year’s income tax savings under the program, if appropriate.

The SR&ED program is designed to provide incentives for companies to invest in innovation. However, like most income tax legislation, the rules are complicated.

‘Over the years, we have filed many SR&ED claims for our clients, resulting in significant income tax refunds.’    Call Joe Truscott today at 905-528-0234 for a free, no obligation consultation regarding possible SR&ED claims for your company!

For further information regarding our services we recommend you review our Additional Services, the Tax Planning brochure, or browse through the many articles Joe has written in our Resource Library.