Recently, the team at Zeifmans conducted an in-depth webinar on the Scientific Research and Experimental Development (SR&ED) tax incentive. Three of our key startup team members – Ahmad Aslam, Mike McGee and Ben Rutman – shared a wealth of knowledge on the program, including how businesses stand to benefit from SR&ED, eligibility, refund amounts, and deadlines for application. In today’s blog post, we’re going to share that knowledge with you. Let’s get started.
What is SR&ED?
The SR&ED program is a federal tax incentive that has been designed to encourage Canadian businesses to conduct research and development (R&D) within Canada. SR&ED incentives help both the individual claimants and the broader economy by encouraging innovation, technological advancement, and the pursuit of scientific and technological knowledge, discoveries, and ideas in Canada. There are roughly 20,000 businesses that benefit from the credit each year, and more than two thirds are small businesses.
How can your business benefit?
SR&ED allows recipients to both deduct eligible expenses from their income and claim a tax credit. This Investment Tax Credit (ITC) can be used to reduce the recipient’s tax bill. In the event that the corporation’s tax payable is less than the value of the ITC, the company may receive a refund.
Companies are able to pool SR&ED expenditures and deduct them against the current year’s income, or in the years following – up to 20 years. The ITC can be anywhere from 15% to 35% of a company’s qualified SR&ED expenditures, in addition, there are provincial programs which can enhance the total refund to over 40% .
Is your business eligible?
In order for a business to qualify for SR&ED, the work must be conducted in Canada, and must fall within the following 3 categories:
Work that does not have a specific practical application in sight, but is conducted for the advancement of scientific knowledge.
Work that does have a specific practical application in sight, and is conducted for the advancement of scientific knowledge.
Work conducted for the purpose of achieving technological advancement that will create new, or improve existing materials, devices, products and processes, including incremental improvements.
In addition to the category of the work, the structure of the company must fall under one of the following:
Canadian Controlled Private Corporations (CCPC)
– Resident in Canada
– Controlled directly or indirectly by one or more non-residents
– Not controlled directly or indirectly by one or more public corporations
– Not controlled by a Canadian resident corporation that lists shares on a stock exchange outside Canada
– Public corporations
– Foreign corporations
Individual proprietors, trusts, and partnerships
– Note that a partnership is not a taxpayer, and thus it does not earn the ITC. Instead, the ITC is calculated at the partnership level and then allocated to eligible members, whether corporations, trusts, or individuals.
How is SR&ED calculated?
SR&ED expenditures are calculated via two methods:
Specifically identifying and claiming all the relevant overhead and expenditures incurred throughout the tax year.
Use a Prescribed Proxy Amount (PPA) as an alternative method to compute overhead and other expenditures.
There are advantages and disadvantages to each approach, and as such it’s best to consider the details of the company’s specific situation in order to decide a method for calculation. More information can be found by viewing the full webinar.
How much refund will you receive?
CCPCs can earn a federal refundable tax credit at the enhanced rate of 35% up to $3 million on qualified expenditures. Expenses over $3 million can claim a non-refundable tax credit of 15%. Trusts and individuals can earn a tax credit of 15% for qualified expenses, which can be used to reduce the payable tax burden. If some of the credit is left over, a refund is available for 40% of the remaining amount.
If you’re located in Ontario, you can receive even greater incentive by qualifying for the Ontario Innovation Tax Credit (OITC) which is 8%, and the non-refundable Ontario Research and Development Tax Credit (ORDTC) which is up to 3.5%. Note that if you qualify for SR&ED, you will automatically qualify for both these credits.
Submissions and deadlines
There are a number of forms that need to be provided during the submission phase of the process, including the T661, Schedule 31 (for corporations), and the T2038 (for individuals). For more information on these forms, view the full webinar.
Forms should be submitted no later than 12 months after the tax return is due. Accepted claims will be processed within 60 calendar days from the date CRA received the complete claim, and claims that are selected for review or audit will be completed within 180 calendar days from the date of receipt.
If you’re in the business of innovation, chances are your company could benefit from the SR&ED credit. Additionally, there are other incentives that may be available for your business. To ensure your endeavor is availing itself of every taxation advantage possible, view our full SR&ED webinar by clicking here, or contact the Zeifmans team today and start a conversation.