In Canada, the federal government offers varying types of tax credits that are specifically designed to drive an increase in innovation and improve the economy. One such program is The Scientific Research and Experimental Development (SR&ED) Program. According to the government of Canada, “The Scientific Research and Experimental Development (SR&ED) Program uses tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada.”
Generally speaking, a tax credit program incentivizes spending in an area by lowering the amount of tax that must be paid and is usually given based on certain requirements for taxpayers. The great part about SR&ED program is that small businesses can recover cash for research and development expenses even if they otherwise have no taxes owing for a given year. Do not let the name intimidate you, coming up with a large new innovative idea is not a requirement to have access to these tax credits. Given the complexity and breadth of the program, the easiest way to apply for these tax credits is to hire a consultant to determine if you have any eligible projects or activities for the SR&ED program.
Scientific Research and Experimental Development (SR&ED) Program Tax Credit
The SR&ED tax credit is used to encourage businesses in Canada, no matter how large or small, to innovate and create. Specifically, any business that engages in the evolution of science and/or technology is applicable for SR&ED. The number of corporations who have access to such programs is unknowingly high, on average the federal government provides around $6 billion in credit payments to thousands of businesses every year. It is believed that close to a third of all Canadian private business may qualify for SR&ED credits. The amount can range from a few thousand dollars to the tens of thousands, including refundable amounts that are refundable whether you have taxes owing or not. This is useful to know in the case where a business fails to make enough money to stay profitable, allowing companies to bounce back and receive cash refunds which can further R&D activities and other business operations.
Benefits of SR&ED Programs
There are many benefits to SR&ED tax credits in Canada, as well as a few SR&ED tax credit misconceptions. One of these more elusive benefits include having access to SR&ED benefits that can provide refundable amounts of cash if not otherwise used to reduce your tax payable in the year.
Another benefit of the SR&ED program allows you to aggregate unused qualifying expenses not claimed in a specific year and carry them over to subsequent years.
SR&ED Tax Incentives
Incentives when it comes to SR&ED include the reduction of expenditure costs related to R&D activities, these include costs for things such as wages, computer programming, engineering costs, and data collection to name a few. Tax credits can also be used to reimburse any development expenses, this includes being able to pay off approximately:
- 64% of permitted salaries
- 33% of contractor payments
- 41% of material costs
However, SR&ED does not cover activities that could be considered to be outside of R&D related endeavours such as market research, sales promotion, advertising, and commercial production. Remember that the SR&ED tax credit program should only be used in relation to activities that are meant to support the improvement of products, new or old.
These programs aren’t just beneficial to Canadians, rather there are many benefits to SR&ED tax credits available outside of Canada. Although the SR&ED benefits aren’t as high as for Canadian businesses, foreign companies can also benefit from SR&ED.
Get Your SR&ED Tax Credits and Benefits
Applying for SR&ED tax credits and rebates
When applying for SR&ED tax credits it is necessary to prove the validity of your project and whether the program you are attempting to claim fits the criteria. Although a generous incentive program, the program is incredibly complex with respect to breadth of qualifying activities and filing your claim. As a significant government incentive, claims are routinely selected for audit by the CRA. The best way to ensure you are maximizing your claim is to seek the help of a SR&ED consultant. These include people with accounting experience, knowledge of the program, and knowledge of your business. A SR&ED consultant can best advise you on how on whether the program fits your project while also working with you to gather all the necessary information required in the process.
Frequently Asked Questions
What does SR&ED stand for?
SR&ED stands for Scientific Research & Experimental Development; it is a tax credit program set up to provide tax benefits to businesses who are involved in Research & Development (R&D) related activities.
How do you calculate the R&D tax credit?
The SR&ED tax credit program is a complex program whose benefit can vary depending on your qualifying activities, your province, and the type of corporation. The R&D credit provides a refundable tax credit, which means you may be eligible to receive a cash refund even if you have no tax owing,