Take Advantage of SR&ED, and Put Research Into Your Budget
There are some very generous research and development tax credits in Canada, and you should be taking advantage of them.
The Canadian government allows innovation tax credits every year to Canadian companies (and Canadian taxpayers) who perform research and development in order to become more competitive. The Program is called the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program (also referred to as: SRED, SR and ED)
The credit may be refundable. This means that in the right circumstances if you have no revenue and/or are not profitable, you STILL get the tax credit back in cash. With a little effort the rewards for claiming “r & d” can be substantial. Keep in mind the credit is not always refundable though, and is only for Canadian-controlled private corporations (CCPCs). Foreign owned, or public companies are not eligible for a refundable tax credit, but still get the benefit of tax credits alone.
How Much Can You Get?
Canadian-controlled private corporations (CCPCs) with less than $200,000 in taxable income can receive an investment tax credit (or ITC) of 35% of SR&ED expenditures, to a max of $2 million. Sole proprietorships are eligible as well.
Public Canadian corporations, foreign controlled corporations, and private proprietorships can receive an investment tax credit of 20% of qualifying SR&ED expenditures.
You get up to $.35 back in either CASH or a tax credit from the federal government for every dollar spent on research.
As well, you can claim an overhead “proxy” which amounts to 65% of your direct cost.
Each province also provides a percentage of the SRED tax credit. This usually amounts to another 10% you can claim (depending on the province, some rates are lower, some are higher).
So how do you apply for SRED (or SR&ED)?
Any Canadian taxpayer can apply – companies or individuals. Using form CCRA Form T661 as part of your annual tax filing, i.e. submitted with the T2 or T1 income tax return.
You can file SR&ED claims as late as 18 months after your filing due date for the year in which the SR&ED expenditure was incurred. You don’t need a lab, or a PhD, or research facililities…just proof and documentation showing you tried something new, and that there was a technological challenge. (Off the shelf solutions are not acceptable by CRA – you must show you had to innovate your way out of a problem instead).
One of the best ways to get the maximum claim, in the shortest time, with the least amount of risk is to engage a SR&ED Engineer. A SR&ED tax claim is 15% accounting and 85% technical, so you need that technical edge to maximize your claim. You also save you time getting someone who is unfamiliar with your engineering processes and technology up to speed, as qualified SR&ED Engineers have over 10 years experience in the field.