For any business owner in Canada engaging in scientific or technological research, the SR&ED program offers extraordinary tax benefits to its claimants and is certainly something to familiarize yourself with.
The SR&ED program is a government-led initiative administrated through the CRA to support businesses conducting research and development in Canada. It strictly supports R&D done in Canada, offered in the form of a refund, income tax deduction, or an investment tax credit. Annually, more than 20,000 businesses tap into funds through SR&ED, totalling over $3 billion yearly.
The Scientific Research and Experimental Development (SR&ED) program is a tax credit program overseen by the CRA. SRED can help individuals and corporations pursuing scientific or technological innovation in Canada. Here is what you need to know about the SR&ED program for beginners.
SR&ED Program Eligibility
SR&ED covers a wide range of applicants. The program is tailored mostly to Canadian-controlled private corporations or small businesses. That said, proprietorships, trusts, partnerships, and publicly-listed companies are also eligible, assuming they meet the other criteria for how SR&ED work is defined and carried out.
To claim the SR&ED tax credit, you do not need to be a scientific or technology company to claim the SR&ED tax credit. The criteria come down to work performed – what it is, how it’s performed, and where and when it’s completed. If you are researching new products or processes in the name of scientific or technological innovation, you could qualify under the program.
SR&ED Claim Eligibility
The type of work that qualifies under the SR&ED program must fall under specific criteria. The work must be conducted in Canada. The work must be done to further technical or scientific knowledge. Basic research and applied research both qualify. Any work done to create or improve a product, device, process, or material can qualify for SR&ED benefits.
Organizations or teams involved in projects relating to or having elements of engineering, design, computer programming, data collection, testing, mathematical analysis, or operations research can also qualify under the criteria. A project can potentially have certain components eligible under SR&ED and others that aren’t. Only that which meets the criteria for this scenario will be considered for any tax benefits.
SR&ED Tax Credits
The SR&ED program can be used in several ways. You get to decide how you wish to use these benefits if/when you qualify for the SR&ED program.
- Reduce your company’s income tax payable using the SR&ED investment tax credit.
- You can receive a refund if the taxes you owe are less than the value of your SR&ED tax credit.
- You can pool your SR&ED expenses and deduct them against future income for up to 20 years.
- If you end up with unused investment tax credits, they can be carried back up to three years.
Eligible SR&ED tax benefits are issued according to your business type and qualifying expenses.
A Canadian-controlled private corporation can receive a tax credit of up to 35% of qualifying expenses of $3 million. When expenses exceed $3 million, the rate is then calculated at 15%. If you are an individual, trust, or other company, the SR&ED tax credit rate is 15% for eligible SR&ED expenses. For additional financial assistance for companies with a hand in R&D, it is worth noting there are R&D programs in various provinces and territories that function similarly to the SR&ED program.
SR&ED Program Coverage
The SR&ED program covers several expenditures, including salaries of those directly involved with SR&ED eligible work, subcontractor costs for those directly involved in SR&ED eligible work, and material costs required to achieve a project’s technological advancement goal. Overhead costs are also included, alongside various other expenses. This program can be advantageous for companies looking to maximize their tax benefits.
SR&ED Program Application
To receive this amount, one must file a claim through income tax. The Canada Revenue Agency administrates the program. Supporting evidence must be provided in the form of tax returns and records, receipts, financial statements, contracts, and documents that outline and support the expenditures you claim. Here is a checklist for what to do for beginners to the SR&ED program.
- Identify any activities, project modules, and projects eligible for SR&ED.
- Identify all supporting evidence and documentation that can be referred to when claiming your SR&ED expenses.
- Prepare a technical report for each SR&ED project per the CRA requirements.
- Identify the related and eligible SR&ED financial expenditures, understanding that additional documentation will be needed to support these claims if reviewed.
- Prepare your SR&ED tax schedule and file the SR&ED claim with your corporate tax return. This is to be done within 18 months past the corporate fiscal year-end. After that time, expenditures are no longer eligible for tax benefits under the program.
For first-time applicants, you may find it easier to go through the SR&ED program with the help of an SR&ED consultant at your side.