The $4 billion tax incentive
08 Sep 2017
Companies that stay in business tend to do so because they are able to solve a need or fulfill a desire of their clients and customers. And businesses that have thrived over the long-term, tend to do so because they have constantly found ways to outshine the competition by designing a better mousetrap or creating more efficient process. But the curious thing is that very few of these creative entrepreneurs are capitalizing on their advancement or improvements.
Allow me to introduce you to the SR&ED tax credit, claimed by over 24,000 companies in Canada. It stands for Scientific Research and Experimental Development Program and its objective is to encourage Canadian businesses in all industries to invest in experimentation and technological advancement. It gives a tax break to companies that commit resources to creating new, enhanced, or technologically advanced products, services or processes.
Could you be eligible?
Many companies assume that they aren't eligible because of a common misconception that the advances have to be scientific in nature. Others are concerned that the costs involved in making the claim will be prohibitive while still others aren't aware that their innovation will be rewarded - by the government! And of course, there are those who just don't realize that the activities of their business even qualify for the credit.
Take a minute to consider your own state of affairs. Have you:
- Created a new product or improved an existing one?
- Improved a process or created a new one to reduce costs or improve workflow?
- Develop some form of custom equipment, machinery, prototype or software?
- Become involved in experimental development to overcome technical issues?
- Tried to any of the above but failed in the attempt?
If you answered 'yes' to any of the above, you could qualify for the SR&ED Tax Incentive Program.
What does that mean for you?
The claims range from $20,000 to $2,000,000 and up to 35% of your qualified SR&ED expenditures are refundable as cash, subject to an expenditure limit of $2,000,000. The refund is intended to help you finance future projects, improve your entity's working capital and further enhance your competitive advantage.
If your entity is a CCPC, then it is eligible for both refundable and non-refundable tax credits that are offset against taxes payable. Any excesses are translated into a cash refund. Other eligible expenses under the program include materials, equipment and machinery and sub-contractors. In addition, the government will give you an automatic 55% bump-up in the wage costs of your claim in order to cover overhead costs that may exist as a result of your SR&ED initiatives.
How does the SR&ED tax credit work?
A claim can only be filed on eligible SR&ED expenditures that are made in Canada. These are defined as Canadian sourced expenditures and they must meet the following criteria:
- Scientific or technological advancement: the main purpose is to try to generate some sort of technological advancement, whether it be in the form of a process or a new improved technology. The attempt does not have to be successful in order to receive a cash refund.
- Uncertainty: it must be unknown as to whether the new or improved product or process will succeed based on the generally available knowledge or experience.
- Content: evidence of qualified personnel with relevant experience in the project at hand must exist.
All claims must be filed within 18 months of the fiscal year-end of the enterprise, ideally with your corporate tax return to expedite the process.
To be certain, applying for the SR&ED tax credit is a complex matter and you are strongly encouraged to seek expert advice.