Tax insights: The Scientific Research & Experimental Development incentive
The Scientific Research & Experimental Development (SR&ED) tax credit is a federal program designed to encourage research and development (R&D) within Canadian businesses, and should be an integral part of the tax planning strategies for a wide range of companies.
The initiative is administered by the Canada Revenue Agency, and is designed to be quite inclusive, applying to businesses of any size, across a number of sectors. The SR&ED program allows applicants to both deduct R&D expenses from their income for tax purposes, and claim an investment tax credit that can be used to reduce income tax payable.
An Incentive For More Than Just Scientific Development
There is a common misconception that R&D only takes place in science labs and research facilities. In truth, companies may qualify for SR&ED tax credits if they have simply created or improved a product, service, or process, or made systematic attempts to do so.
But how do you know when your business may be eligible? Here are some tell-tale indications that your company will likely qualify for SR&ED tax credits:
- You have attempted to create or modify a product or process (regardless of whether you’ve succeeded or failed)
- You have developed some form of custom machinery, equipment, prototype, or software
- Your company is in a start-up or growth phase
Dispelling the SR&ED myths…
Many eligible businesses neglect to claim SR&ED work based on faulty assumptions. It’s important to distinguish fact from fiction in order to ensure your company claims every tax credit to which it is entitled.
- Applying may trigger a full-blown CRA audit. Filing a claim for SR&ED tax credits will not draw any extra attention as long as the claim is accurate and reasonable.
- I will have to share secret/proprietary knowledge. The specific details of your R&D projects will not need to be disclosed; only the associated expenses.
- Failed attempts are not eligible. Resources spent on any R&D attempt can be claimed, regardless of outcome.
Can I Qualify for the SR&ED Tax Incentive?
While the SR&ED favours Canadian-Controlled Private Corporations that earn refundable tax credits at an enhanced rate (of 35% instead of 15%, up to a certain threshold), the SR&ED tax incentive is also applicable to any individual, corporation, or trust who conducts business in Canada.
How can I tell if my R&D qualifies?
There are three primary criteria for work projects to qualify for the SR&ED tax incentive:
- Uncertainty. It must be unknown whether or not the project will succeed. Failure is acceptable.
- Scientific Content. The research must be conducted by qualified personnel, using a systematic approach.
- Advancement. The purpose of the research must be an attempt to generate knowledge. This ties very closely to the ‘Uncertainty’ condition.
Many qualified companies inadvertently leave money on the table by either underestimating their SR&ED claims or not filing any at all. If you feel that your business may qualify for the SR&ED tax credit, make sure that you contact one of our corporate tax consultants today.