Do you have a groundbreaking business idea that you are hesitant to pursue due to cost considerations? Have you heard about the Canadian Government’s Scientific Research and Experimental Development program or SR&ED?
If you want to take your company in a new direction but waver at the thought of its corresponding costs, then it is time you learned about the SR&ED program or R&D Refunds program Canada.
What is the Canada SR&ED Program?
If your business is engaged in a science or technology-related industry, then you understand how difficult it is to innovate. Coming up with a groundbreaking idea is a challenge in and of itself. Developing it for practical use is even harder. Still, it is a challenge that must be met if industries are to be sustainably beneficial to target consumers.
This is where the Canada Revenue Agency’s Scientific Research and Experimental Development program comes in.
The SR&ED Program is a tax incentive program created for Canadian businesses of all sizes in all sectors. Its end goal is to help companies develop new processes, devices, materials, or products of any form that can improve the consumers’ quality of life.
The SR&ED Program offers innovative businesses much-needed support in the form of income tax deductions, Investment tax credit, or refunds (in certain cases). Every year, the program processes over 20,000 SR&ED claims amounting to over $3 billion in tax incentives.
What Projects Qualify for the Program?
The government’s SR&ED program is open to Canadian businesses of all sectors. However, it is important to find out first if your potential project is eligible for the SR&ED tax credit. Below are the three qualifying criteria:
• Basic Research
This is a type of project designed purely for the advancement of scientific knowledge with no immediate or intended practical application. It is normally carried out in a laboratory and under a controlled environment. Once done, the results are published in scientific journals for others in the innovation community to evaluate, verify, or build on.
• Applied Research
This is a type of research design intended to solve a specific problem or lead to an innovative solution with the end goal of a practical application for economic growth. Like basic research, its results can also be published in scientific journals.
• Experimental Development
This type of project aims to achieve technological advancement in the form of new material, process, or consumer product, or the improvement of an existing one.
Your project would also be eligible for an SR&ED claim if it supports a taxpayer’s work that meets the above criteria. However, it is important to note that there are exclusions that would say a project does not qualify. As a general rule, a type of work that leads to technological advancement solves a scientific uncertainty or involves a detailed and systematic investigation by trained people qualifies for the SR&ED.
How Can Your Business Benefit from SRED Credits?
As virtually any business can avail of the SR&ED tax incentives, the tax incentive program attracts all types of companies. The benefit comes in three ways: as an investment tax credit or ITC, as income tax reduction, or as a direct refund. However, the amounts may vary from one type of business to another:
• Canadian controlled private corporations
A private corporation that has been operating in Canada since 1971 and is not controlled by non-resident individuals nor lists its shares outside of the country is considered a Canadian-controlled private corporation. This type of company stands to earn a refundable ITC of 35% on SR&ED-eligible projects worth $3 million. If aside from being a CCPC, the company also meets the criteria for being a qualifying corporation, a refundable ITC of 15% for over $3 million is added, and 40% of the ITC can be refunded.
• Other corporations
Corporations that do not fall under the definition of the CCPC can also benefit from the SR&ED program should their project qualify. This can be in the form of a non-refundable ITC amounting to 15% of the total expenditures, resulting in a reduction of the payable tax.
• Individuals and trusts
Proprietorships and trusts can also apply for the SR&ED program. If their projects meet the criteria, they stand to earn a refundable ITC with a rate of 15% of the project spending. Once the ITC is applied against the tax payable, the CRA can proceed to refund 40% of the ITCs that have been earned for the year but not yet claimed.
• Members of a partnership
A partnership is not a taxpayer and could not earn an ITC directly. If you have plans of claiming a SRED claim for a partnership, the ITC would indeed be computed at the partnership level. Then it will be allocated to eligible members such as individuals, corporations, or trusts.
Find Out More About the SR&ED Program
The concept of the SR&ED tax credit can be confusing, especially if it is your first time hearing about it. To find out more about this incentive program, how you can benefit from it, or to complete your form T661, contact us today at EVAMAX.