Research and Development (R&D) is not only good for Canadian businesses generally, but a good thing for individual businesses to be involved in.
Our federal government has many programs devoted to encouraging innovation, meaning that a lot of funding is accessible through R&D. One of the best of these programs is the SR&ED (Scientific Research and Experimental Development) Tax Credit Program.
Think that you have to have a PhD and a state-of-the-art lab to be involved in R&D? Think again. R&D activities can be integrated with your daily business activities.
And the SR&ED tax credit program is a great deal. "Generally, a Canadian-controlled private corporation (CCPC) can earn an investment tax credit (ITC) of 35 percent up to the first $3 million of qualified expenditures for SR&ED carried out in Canada, and 20 percent on any excess amount. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC of 20 percent of qualified expenditures for SR&ED carried out in Canada" ( Canada Revenue Agency).
This is a refundable tax credit, which means that even if your business makes no profit, you will get the appropriate refund back in cash.
Besides the eligibility for these investment tax credits, R&D tax incentives provide a full tax deduction in the year the expenditures are incurred, even if they are capital in nature. You can also carry over R&D deductions to the extent that they are not needed in the current tax year.
Because of the generous ITC rates and related R&D tax incentives, going to the trouble of preparing an R&D tax claim is definitely worth it!
Who & What Qualifies for R&D Tax Incentives
The first point to note is that these SR&ED tax credits are open to all types of businesses. Sole proprietors and partnerships may qualify, too, as long as they meet the SR&ED project requirements.
To qualify for the SR&ED program, says the CRA, "work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel." They list work that qualifies for SR&ED tax credits as including experimental development, applied research, basic research and support work. (They also provide a list of examples of work that will NOT qualify for SR&ED tax credits.)
It sounds difficult and "high-falutin", but don't let that put you off. When planning your R&D project, you need to be sure that you’re working towards something that is truly new and not information that is common knowledge at the time. The scientific or technological uncertainty is a condition of the process, just as in your high-school science class experiments. And you would, of course, perform your R&D activities in an orderly fashion and fully document your activities, just as you would with any work you perform.
Note too that your R&D activities do not have to be successful to qualify for the SR&ED program. Again, just like your high-school science class experiments, it's the process that's important.
Perhaps best of all, the SR&ED tax incentives program is not a “prepare a proposal for your project and wait to see if it gets approved” type of program. You can just design and carry out your project (bearing all the above qualifying caveats in mind) and then make your tax claim (by completing Form T661, Claim for Scientific Research and Experimental Development (SR&ED) in Canada, and the appropriate Investment Tax Credit schedule and submitting them as part of your income tax filing.)
The fact that most provincial governments also provide R&D tax incentives is another great reason to get involved in R&D. For instance, Ontario has a Deduction for Federal R&D Investment Tax Credit permitting a deduction from Ontario taxable income of the amount of federal ITC claimed in the preceding taxation year. (This deduction is limited to the part of the federal ITC that can reasonably be considered to relate to Ontario R&D expenditures.) And that’s just one example.
(Note that some provincial R&D tax incentives only apply to corporations, unlike the federal SR&ED tax credit program.)
Continue on to the next page for more information on the SR&ED Tax Credit program and tips for accessing even more funding for R&D activites.