Smart companies know the competitive advantage of committing resources to innovation, but few take advantage of the government tax credit programs. The Scientific Research and Experimental Development (SR& ED) Program is a Canadian federal tax incentive plan. It encourages businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada that will lead to new, improved, or technologically advanced products, services, or processes. The SR&ED Program is the federal government’s largest expenditure for industrial research and development. The Provincial governments also offer tax incentives under their own SR&ED programs.

Companies can be reluctant to get involved with creating new or improved technology for fear of over-whelming costs, and the misconceived notion that they don’t get a break on their taxes for their ability to look to the future. The SR&ED Program is designed to break such thinking. Now, provided you satisfy certain criteria, the Federal and Provincial Governments will reward you for looking ahead.

Those who take advantage of the SR&ED Program, can apply for investment tax credits for expenditures such as: wages; materials; machinery; equipment; some overhead costs; and SR&ED contracts.

What does it all mean? For example, let’s suppose you have a mousetrap that catches the mice alive, but it seems to injure their tail in the process. Because you are humane, you want to create or alter the mousetrap so that it causes no injury to the mouse at all. Improving your mousetrap in this one small increment of technology can earn you a tax credit.

Who Qualifies For SR&ED?
This is a Canadian tax benefit that allows Canadian-controlled private corporations with less than $500,000 in taxable income to receive a refundable investment tax credit (ITC). You can receive 35% of qualifying SR&ED expenditures – up to a maximum of $3 million in expenditures. The provincial benefits will vary accordingly by province.

Other eligible organizations include Canadian corporations, proprietorships, partnerships, and trusts, any of which can receive an ITC up to 20% of qualifying SR&ED expenditures.

Now building a better mousetrap is a great technological advancement, to be sure, but what about your company? To qualify for the SR&ED Program, according to the Canada Revenue Agency: “work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel.” It’s complex answers like that that show why it’s beneficial to bring in a business adviser who knows the tax laws and can help you determine if you qualify for the SR&ED Program.

If you make a technological advancement that utilizes new materials, devices, products or processes and that improves an existing product or process, you can qualify for SR&ED.

Other work that qualifies for SR&ED is the use of applied research to advance scientific knowledge with a specific application in mind. Another way is through using basic research to advance scientific knowledge without a practical application in mind; or provide support work via engineering, design, mathematical analysis, etc. However, this qualifies only if the work is used or supports the experimental development or applied or basic research.

Activities not eligible for tax benefits under the program include: social science and humanities research; commercial production of a new or improved material, device or product (i.e. the latest Fall fashions). Still more activities that are ineligible are: market research or sales promotion; quality control; data collection; development based on design or routine engineering practice; and the exploration for minerals, petroleum or natural gas.

Generally, the expenditures must be made in Canada. Even if you have created a new technology - if you have contracted someone from another country - you will not be allowed to make a SR&ED claim. Work cannot be done by someone from outside of Canada or performed by a non-resident. The objective is to stimulate the Canadian economy and to retain knowledge and know how in Canada.

Should your company wish to submit a claim for SR&ED expenditures made in a particular year, note that the claim must be complete within the 18-month filing deadline, it will be rejected by the Canada Revenue Agency (CRA). The 18-month period commences at the end of each taxation year.

Interlinx Consulting Inc. can help determine if your company’s activities will qualify for the Federal and Provincial SR&ED benefits. We can assist with the technical project descriptions and the claim of your SR&ED expenditures and tax credits in your tax return. We can also advise if your current accounting system needs to be modified to identify your projects, and capture employee time and expenditures. And, finally we can participate in the review of your claim by CRA. It would be a shame if you lost out on all those hard-earned tax benefits.