Canada, and in particular beautiful British Columbia, may be the best place in the world for product-based technology companies to conduct research and development (R&D), all because of SR&ED tax credits.
To stimulate R&D in Canada, companies can claim Scientific Research and Experimental Development tax credits – SR&ED (pronounced “shred”) for short. With SR&ED, you can get up to 64% of salary expenses back on eligible R&D projects. Last year, this added up to 23,000 companies receiving $3.4 billion in tax credits refunds from the Canada Revenue Agency (CRA). Here are some of the details:
You have to be incorporated in Canada, and conduct your R&D within Canada. To maximize the benefits, you have to be a Canadian-controlled private corporation (CCPC), but any corporation (even foreign controlled subsidiaries) can receive a tax credit on qualifying R&D expenses.
The hardest question to answer is what R&D expenses qualify for SR&ED. Basically, you have to conduct R&D on something solving a technical challenge that is new, and where there is a technological risk involved in finding the solution. Routine engineering and product development work may not qualify. Simply answer these five questions to determine if your project is eligible:
- Is there a scientific or a technological uncertainty? In other words, are you solving a technical challenge that cannot be solved with existing standard practices?
- Can you formulate hypotheses specifically aimed at reducing or eliminating the uncertainty?
- Is the procedure you plan to use consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?
- Will your project result in a scientific or a technological advancement? Note that this can be either because your project is successful, or because you failed and proved your hypothesis wrong.
- Will you keep a record of the tests and results as your project progresses?
If you are not sure if your project is eligible, your local CRA office can provide a free assessment – see the links at the end of the article for more information on this.
Once you know your project qualifies, you can get up to 64 cents back on every dollar spent on R&D salaries. Here’s how the math works:
Let’s say you are paying out $100K in salaries for research on the project (e.g. two engineers making $75K/year who spent 2/3rd of their time on the project). You can then add 55% on top of this as a proxy for general overhead. So your total claimable R&D expense is now $155K.
As a CCPC, you get 35% of this back from the Federal Government ($49K), and if you are located in BC, you get another 10% credit from the Provincial Government ($15.5K) for a total of over $64K! This number is lower for non-CCPCs (who get a 20% Federal refund) and can be different in other provinces.
So your net cost of your eligible R&D project went from $100K in salaries, to $36K – a great reason to conduct R&D in British Columbia!
How to apply?
You can claim SR&ED tax credits by filling out form T661 as part of your annual tax filing. If you plan ahead, you will have documented your project, checked for eligibility, and tracked the time for your staff working on the project in a spreadsheet. This will prepare you for any reviews of your SR&ED claims.
Where do I get help?
You can hire a consulting company to help you with your claims – they typically charge a fee for service based on a percentage of your tax credits. However, the CRA has a number of resources available, for free, that should set you up to file your SR&ED claims yourself. See this page on CRA services for details on their resources.
Investing in R&D is expensive. But with Canada’s SR&ED tax credits, you can maximize your R&D budget. In addition to SR&ED, there are many other funding programs available from the Canadian Government that can help you extend your R&D dollars.
Disclaimer – This is not tax advice nor is it written by a tax accountant. If you think SR&ED applies to your projects, work with an accountant and the CRA on your tax filing.
As an Advisor for Canada’s National Research Council - Industrial Research Assistance Program (NRC-IRAP), Erik Kaas helps small businesses in BC to learn more about government programs that can provide funding. You can contact him directly at Erik.Kaas@nrc-cnrc.gc.ca or follow him @ErikKaas to stay up to date on funding opportunities.