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Investing in Innovation - The $8 Billion Scientific Research & Experimental Development tax incentive |
Let’s face it – companies that stay in business, tend to do so because they are able to solve a need or fulfill a desire of their clients and customers. And businesses that have thrived over the long-term tend to do so because they have consistently found ways to outshine the competition by designing a better mousetrap or creating a more efficient process. But the curious thing is that very few of these creative entrepreneurs are capitalizing on their advancements or improvements.
Allow me to introduce to you the SR&ED Credit. It has become the best friend of approximately 11,000 very wise (and now very happy) companies in Canada. It stands for “Scientific Research and Experimental Development” Program and it was devised by the Canada Revenue Agency (CRA) to encourage Canadian businesses in all industries to invest in experimentation and technological advancement. It gives a tax break to companies that commit resources to creating new, enhanced, or technologically advanced products, services or processes.
The SR&ED Program is Canada’s largest, yet most underutilized tax incentive plan. Many companies assume that they aren’t eligible for the credit because of the common misconception that the advances have to be scientific in nature. Others are concerned that the costs involved in making the claim will be prohibitive while still others aren’t aware that their innovation will be rewarded – by the government, no less! And of course, there are those who just don’t realize that the activities of their business even qualify for the credit. So, it’s quite possible that you might be eligible for a sizeable cash refund, without even knowing it. Take a moment to consider your own state of affairs. Have you:
- Created a new product or improved an existing one?
- Improved a process or created a new one to reduce costs or improve workflow?
- Developed some form of custom equipment, machinery or prototype?
- Designed or developed new software?
- Become involved in experimental development to overcome technical issues?
- Have you tried to do any of the above but failed in the attempt?
If you answered ‘yes’ to any of the above questions, you could qualify for the SR&ED Tax Incentive Program.
So what does that mean for you?
Regardless of whether you are a Canadian Controlled Private Corporation (CCPC), a non-CCPC or a proprietorship, partnership or trust, your entity can still be eligible for the SR&ED tax credit. According to the CRA, approximately 11,000 companies in Canada, of which 75% are small to medium size enterprises, file for SR&ED credits each year. The claims range from $20,000 to $2,000,000 and up to 35% of your qualified SR&ED expenditures are refundable as cash, subject to an expenditure limit of $2,000,000. The refund is intended to help you finance future projects, improve your entity’s working capital and further enhance your competitive advantage.
If your entity is a CCPC, then it is eligible for both refundable and non-refundable tax credits that are offset against taxes payable. Any excesses are translated into a cash refund. Moreover, you can get a 40% cash refund on qualified capital SR&ED expenditures and a full cash refund on current eligible expenditures. To put things into perspective, you can recover up to $0.68 of every $1.00 in wages spent on qualified SR&ED activities. This means that if your company has spent $200,000 in qualified wages, it will recuperate $136,000 to offset against taxes payables and any remaining balance translates into a direct cash refund. Now that’s a fantastic investment for your money!
Other eligible expenses under the SR&ED program include materials, equipment and machinery and sub contractors. In addition, the government will give you an automatic 65% bump-up in the wage costs of your claim in order to cover any overhead costs that may exist as a result of your SR&ED initiatives. And that’s not all! The federal government is even willing to absorb the financial losses that you may incur in SR&ED costs - even if your projects are not successful. So, if your company’s latest initiative doesn’t pan out to be the next ultra-successful Blackberry, don’t worry - you may still be eligible to receive a cash refund. Failed experiments can qualify for the credit if they result in an advance in knowledge – i.e. which routes should NOT be taken.
So, how does it work?
A claim can only be filed on eligible SR&ED expenditures that are made in Canada. These are defined as Canadian sourced expenditures and they must meet the following criteria:
1. Scientific or technological advancement: comprises the majority of claims, of which the main purpose is to try to achieve some sort of technological advancement, whether it be in the form of a process or a new or improved technology. Again, the attempt does not have to be successful in order to receive a cash refund as long as knowledge has been advanced in some way.
2. Uncertainty: scientific and technological uncertainty must exist regarding whether a specific result or objective can be achieved. In other words, it must be unknown as to whether the new or improved product or process will succeed based on the generally available scientific or technological knowledge or experience.
3. Content: evidence of qualified personnel with relevant experience in the project at hand must exist. This does not mean that scientists with test tubes and lab coats are required! However, it does mean that individuals who lack formal training but who have sound experience can qualify.
Support work is also eligible if it is part of the following types of work:
- Psychological research;
- Testing;
- Data collection;
- Mathematical analysis;
- Operations research;
- Engineering;
- Design; and Computer programming
In order to be eligible for a refund, all claims must be filed within 18 months of the fiscal year-end of the enterprise. Ideally, the claim should be filed with your corporate tax return, in which case your refund will be processed in 4 months. If the claim is filed separately from your tax return, however, the processing time jumps to 8 months.
To expedite the process, it is vital that you file your claim simultaneously with your corporate tax return and maintain complete records of all SR&ED project financial costs, benchmark process reports, drafts, lab test results, third party work and any other relevant records.
To be certain, applying for the SR&ED tax credit is a complex matter and you are strongly encouraged to seek expert advice. SBLR LLP Chartered Accountants can help your company determine if you will qualify for the tax incentive program and we can assist you in making the actual claim. We can advise you about the suitability of your existing accounting systems for capturing the necessary project information and we can participate in the review of your SR&ED claim by the Canada Revenue Agency.
After all, a wise man once said “Build a better mousetrap and the world will beat a path to your door.” But perhaps just as important, if you build that better mousetrap, and with the proper guidance, a nice big tax refund just might find its way to your bank account!
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Posted: June 10, 2009 at 09:35 PM
By:
Shawn Rosenzweig
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