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- Tax Credits
The SR&ED tax credit program is the largest federal government program funding R&D and innovation in Canada. It was estimated in 2012 that the government expenditure in support of business will be approximately $3.6B. This does not include provincial SR&ED credits which can add another $800M to the benefit received by business.
The SR&ED program is designed to encourage all businesses, regardless of sector or size, to conduct R&D in Canada that will lead to new, improved or technically advanced products or processes. Approximately 20,000 to 25,000 companies have been claiming SR&ED each year over the past 5 years.
The SR&ED program was introduced in 1985. While there have been numerous changes, the core criteria or definition as to what projects and work constitute SR&ED has not changed. The SR&ED program is administered by Canada Revenue Agency at the Federal level; certain provinces also offer tax credits for qualified companies under the program.
Many complex provisions exist under the Income Tax Act as well as numerous precedent-setting court cases, along with administrative positions set out by CRA. RDP helps clients cut through this maze of rules so that successful claims can be made quickly, efficiently and expediently.
SR&ED Program Benefits
In comparison to other countries, the funding provided by the Canadian government ranks in the top 3. The Canadian SR&ED program offers significantly more funding than the US and UK R&D tax credit programs.
For small Canadian controlled private corporations (CCPCs) that meet certain criteria, the SR&ED Tax Credit Program acts almost as a government grant, offering cash reimbursements of eligible expenditures on an annual basis.
For small to medium CCPCs, the federal government provides a refundable tax credit rate of 35%. If your company doesn’t owe any tax in a given year, the SR&ED Tax Credit is refunded in cash.
The provinces also provide R&D incentives, which are administered in combination with the federal SR&ED program. For example, Ontario makes available a 10% refundable tax credit and a 4.5% non-refundable tax credit. When combined with the federal benefits, certain companies can be reimbursed for up to 48% of their eligible expenditures.
Large, foreign controlled or public companies, as well as individuals and partnerships, which are not eligible for the federal 35% refundable tax credit are eligible for a 20% non-refundable federal SR&ED tax credit.
SR&ED Program Eligibility
In order to make a claim under the SR&ED project, a company must identify an eligible project. The key criteria for a project to qualify as SR&ED are:
• Technological Uncertainty
• Technological Advancement
• Technological Content
Good candidates for SR&ED tax credit claims are companies which:
• Develop or improve a new product
• Develop or improve a new process
• Apply for patents
• Have technical staff with scientific or academic qualifications
• Develop prototypes
• Can identify significant technical problems that need to be addressed in their process, product or service
The basic expenditures that can be claimed for SR&ED tax credits are:
• Employee labour on eligible activities
• Subcontracts with Canadian suppliers
• Materials consumed and transformed in the course of a project
• Overhead costs required for the project (can be calculated via the simple “proxy” method)
Filing a SR&ED Claim
There are two components of an SR&ED Tax Credit claim: the first component is identifying an eligible SR&ED project and writing up a project description; the second component is to identify the eligible expenditures that qualify as SR&ED which can then qualify for a tax credit. To submit a SR&ED claim, the company must complete federal and applicable provincial SR&ED forms and file these along with the corporate tax return or an amended corporate tax return if the original return has already been filed. There have been numerous changes to these forms over the years, especially the main form, T661. The most recent form (version 13) must be filed commencing Jan/14. Penalties apply if this form is not completed and filed properly, particularly in respect of the newly added Part 9 of the form which requires disclosure of fees paid to 3rd party preparers in respect of filing the claim.