Getting tax credits for your R&D
This fact may surprise you: The largest single source of support from the federal government for industrial research and development in Canada doesn’t come from business grants or funding programs.
It comes from tax credits through the Scientific Research and Experimental Development (SR&ED) Program.
Canadian companies received over $3.6 billion in investment tax credits in 2012 for expenditures incurred on SR&ED, making it one of the most generous R&D tax incentive program in the world.
Maximizing your R&D tax benefit
If your business is spending money on SR&ED, you may be eligible to receive more tax credits than you know.
There are three types of work that qualify:
- Basic research: to advance scientific knowledge but has no specific practical application
- Applied research: to advance scientific knowledge and has a specific practical application
- Experimental Development: to achieve advancements in technology to improve existing or create new materials, devices, products or processes
The Five Question Test
If your work satisfies these five questions, then it qualifies as SR&ED:
- Was there a scientific or a technological uncertainty that could not be removed by standard practice?
- Did the work involve formulating hypotheses aimed at removing or reducing the uncertainty?
- Was the overall approach consistent with the scientific method including formulating, testing, and modifying the hypotheses?
- Did the approach result in a scientific or a technological advancement?
- Was a record of the hypotheses and the results kept as the work progressed?
The CRA website has more information on what work qualifies for SR&ED tax incentives.
The program allows a taxpayer to deduct from business income expenditures for SR&ED work done in Canada. The expenditures can include wages, materials, and SR&ED contractors.
Private Canadian companies can earn an investment tax credit of up to 35% for the first $3 million of SR&ED expenditures and 15% for amounts over that threshold. The credit earned at the 35% rate can be refunded.
Other companies can earn a non-refundable tax credit at 15%. A non-refundable tax credit can be carried over to future years or back to prior years if there is no income tax to pay in the year.
How do I claim for SR&ED tax incentive?
To make a claim for SR&ED, you must file an income tax return.
If you’re claiming for the first time, the CRA provides free advice through a local tax services office.
The agency also has a self-assessment and learning tool (SALT) which can help you to determine if the work you have done has the potential to satisfy the SR&ED requirements and estimate the expenses you might be able to claim, along with tips on submitting a claim.
For more information