Before 1994, companies reported all SR&ED (Scientific Research and Experimental Development) expenditures to Revenue Canada. Now, it is up to each company to calculate their expected SR&ED investment tax credit.
Table of Contents
What is SR&ED Tax?
Unlike most government incentives, the SR&ED tax credit wasn’t limited to specific projects or industries. This is important because it gives companies greater flexibility to conduct research and development that may not be commercially viable at the time of investment. For this reason, the SR&ED tax credit is one of the most generous R&D incentive programs in the world.
The SR&ED tax credit is the largest single source of federal government support for business-led R&D in Canada, with over $3 billion disbursed annually to more than 20,000 claimants.
How It’s Easier for Corporations?
In 1994, they introduced a few changes to the SR&ED program. They designed these changes to make the system more predictable and easier for corporations to use.
The most significant change was that the CRA no longer required corporations to include overhead costs in the calculation of their qualifying SR&ED expenditures. They did this because CRA believed that the traditional method was more difficult for corporations to understand and calculate. Corporations could choose to use the proxy method instead, which was more straightforward.
Another change was that the ceiling on SR&ED expenditures was now based on the corporation’s taxable capital, rather than its taxable income. They meant to ensure that the program was equitable between corporations of all sizes and to eliminate any regressivity.
Currently, a CCPC can claim up to 35% of its eligible SR&ED expenditures as an ITC. CCPCs can also earn up to 8% of their SR&ED work as an OITC and 3.5% of their SR&ED work as an ORDTC.
How to Qualify for SR&ED?
To qualify for SR&ED, companies must prove that their activities were scientific research or experimental development. This can be difficult, and it is important to document all aspects of a project in great detail. This is why it is essential to keep time sheets, notebooks, diaries, e-mails and meeting minutes. Additionally, it is significant to calculate a project’s costs accurately.
What Can You Claim?
To qualify for the SR&ED program, your work must meet specific technical requirements. It must involve a systematic investigation or search in a field of science or technology through experiment or analysis. It must also seek to resolve scientific or technological uncertainty.
In other words, you must be aiming to achieve something new that pushes the boundaries of current knowledge or understanding. You may be able to claim expenses such as wages and salaries, sub-contractors fees, equipment costs and materials. However, routine data collection and marketing & sales activities are not eligible.
What is the Process to Calculate SR&ED Tax Credits?
The process of claiming SR&ED credits involves determining your qualified expenditures. These are your eligible R&D costs which include staff, sub-contractors, and materials. To calculate your staff costs, start by keeping track of the hours they work on SR&ED projects. Furthermore, multiply their actual hourly rate (if paid hourly) or their deemed rate (if on salary).
For your sub-contractors, total all the work performed on a particular project and claim 80% of this amount as a sub-contract cost for SR&ED. Finally, your material costs are comprised of items used to craft prototypes and materials consumed during experiments.
Depending on the type of business you run, your qualified SR&ED expenses may be higher or lower. The CRA provides a more generous investment tax credit to small businesses than larger or foreign-owned corporations.
Using the right time-tracking software can help you accurately capture all eligible expenses. Our SR&ED experts can advise you on the best solution for your needs and provide you with a comprehensive approach. In addition, it will increase your funding while saving you time spent on paperwork and administrative tasks.
What Are the Benefits of SR&ED?
The SR&ED program delivers three key benefits:
- To increase your business’ competitiveness by making your products and services more innovative and advanced.
- To generate economic growth by stimulating innovation and supporting research and development in Canada.
- The SR&ED tax incentive is designed to encourage businesses in all sectors to make investments in R&D. The SR&ED program allows businesses to deduct SR&ED expenditures from their taxable income or carry them forward indefinitely to reduce future tax liability. This means that you can receive a significant return on your investment. And offset the cost of any eligible R&D projects.
Ultimately, the benefits of the SR&ED program come down to three components:
- an income tax deduction,
- an investment tax credit
- and, in some cases, a tax credit refund.
The SR&ED tax incentive rewards companies for undertaking SR&ED, acknowledging the high degree of risk associated with it. The incentive compensates for the cost of this risk by providing a generous proportion of the resulting expenses through federal tax incentives.
Canadian-controlled private corporations (CCPCs) that incur qualified current and capital SR&ED expenditures receive a refundable Investment Tax Credit (ITC) equal to 35% of these expenses. You can apply this ITC to reduce your tax payable in the year of the claim. You also have the option to carry any unused ITC back three years or forward up to 20 years. So, depending on your taxable income in the year of claim, this may result in significant income tax savings.