Research & Development Tax Credits

Research and Development income tax credits are very significant income tax credits that result in very large tax refunds and are surprisingly available to many small businesses like yours!

The traditional image that often comes to mind when the term "research and development" is mentioned is one of scientists in lab coats working in laboratories to create new inventions.

However, more and more small businesses have recently discovered that Canada Revenue Agency considers a much broader range of activity to be eligible for their Scientific Research and Experimental Development ("SR&ED") tax incentive programs. For example, farmers, manufacturers, fabricators and other non traditional researchers are qualifying under the Canada Revenue Agency program. In some cases, applicants can receive income tax benefits equal to nearly 70% for their research and development expenditures!

The SR&ED program provides investment tax credits ("ITCs") calculated as a percentage of amounts expended on SR&ED. Most small Canadian companies can earn 35% fully refundable federal Investment Tax Credits, while larger companies and other types of business entities can still earn 20% potentially refundable of Investment Tax Credits. As well, some provinces (like Ontario) also grant Investment Tax Credits in addition to the federal amounts available. Ontario provides up to 10% of Investment Tax Credits (refundable) on the same expenditures as the federal claim.

Salaries, materials, consulting, related overhead SR&ED expenses and some capital assets used or consumed in the SR&ED activity can be included in the R & D claim. A special formula is available to use a certain percentage of "overheads" incurred by the business to be included in the claim. Under this method, eligible salaries are increased by an additional 65%. In business operations where employee labour is a very significant component of the SR&ED expenditures, this alternative can provide very significant financial advantages while reducing administrative time and effort.

There has been very much written by the Canada Revenue Agency about what activities and expenditures qualify in specific industries. In most situations, to be eligible for the SR&ED claim, the project must involve research to advance knowledge or include experimentation to achieve technological advancement in products or processes. The can be interpreted very broadly, so that the expenses of developing many new products or methods of manufacturing may qualify.

Over the past few years, Canada Revenue Agency has made significant strides in its approach to the SR&ED program. Many additional services and resources have been made available to potential claimants to educate them about the program and provide them with a much better chance of qualifying for the very significant income tax benefits. All claims are being reviewed much faster and assessments issued by Canada Revenue Agency are being receive much faster as well.

The filing deadline for a SR&ED claim is 18 months from the end of the taxation year, but this depends upon your business. Accordingly, its possible to go back to the preceding taxation year and amend a corporate income tax return that has already been filed. This provides the opportunity for the first time claimant to recover a prior year's income tax savings under the program, if it was missed on the original filing of the tax return.

The SR&ED program is designed to provide incentives for companies to invest in innovation. However, like most income tax legislation, the rules are quite complex.

Over the years, we have filed many SR&ED claims for our various clients, resulting in some very significant income tax refunds. Please call Joe Truscott today at 905-528-0234 to discuss your possible SR&ED claim!

Joe Truscott has written many individual income tax and business articles which have been posted here for you to review. You can also review many additional articles that have appeared in his quarterly client bulletin called Business Matters.