Canada’s Scientific Research and Experimental Development Tax Credit
One of the challenges many companies face is losing opportunities because they don’t have the funds to develop new technologies, thereby risking becoming obsolete in an increasingly competitive business environment. Amendments to Canada’s scientific research and experimental development (SR&ED) tax credit—the most generous in North America—aim to change that direction. The new rules mean more established and growth-staged companies can pursue ongoing scientific research and experimental development (SR&ED) by reducing costs by up to 64 per cent, when overheads are included. Companies already investing in SR&ED now have the freedom to tackle innovation challenges or invest in technology opportunities in a deep and sustained way they might not otherwise be able to afford or develop locally.
Opening the innovation ecosystem
Since 2019, all private Canadian controlled companies with taxable capital not exceeding $50 million have been able to submit a claim for a 35 per cent base rate if they’ve invested in SR&ED. Prior to 2019, the 35 per cent base rate was limited to companies earning less than $800,000 in taxable income. All other qualified companies receive a 15 per cent tax credit.
This means Canada can continue to develop and grow its innovation ecosystems and not penalize companies that have moved into a profitable position. Removing the $800,000 limit is expected to spur R&D spends in industries including technology, agriculture, cannabis, life science, engineering, and manufacturing.
Payback from a successful SR&ED claim
- The benefits of the SR&ED tax credit extend beyond a tax break:
- Companies no longer have to budget 100 per cent of their costs based on available capital.
- The credit can significantly discount Canadian R&D costs in the form of wages, materials, and subcontractor costs.
- The extra capital allows companies to afford more senior or experienced engineers.
- More funds can increase development or engineering teams, helping finish projects quicker or increase the level of investment in the company’s technology or IP.
- Companies are encouraged to maintain engineering or development levels and take on more technically challenging projects or ideas as the government is willing to support eligible projects.
How to apply – successfully
The SR&ED application form is complex, which is why it’s a good idea to consult with an experienced advisory team which can help ensure you’re not overlooking any elements of the claim. Advisors who understand your sector can help you define the role of R&D in your company, pinpoint exactly what is eligible, and improve the quality of your submission. In short, they can help you streamline the process.
As an added bonus, relying on professionals to handle the complicated aspects of an application process or policies means you don’t have to give that arduous task to your developers or engineers. Instead, they can focus on what they do best: driving growth and innovation.
Document your projects
Just like you save receipts for tax season, you must document your projects so you have the necessary details on hand in a review scenario. Broadly, these documents will help you showcase what you have done and spent in your R&D developments. When you’re kicking off a new R&D project, make sure you’re capturing the who, what, when, why, and how.
Track your costs
The devil is in the details: it’s critical to document all of your company’s R&D costs. This is something you probably already do through online platforms or internal software, but it’s always beneficial to reach out to an advisor for guidance on whether you’re tracking the right details. As long as you’re following best practices in documenting costs to run your business, adjusting your processes to be compliant with a review from the CRA can be made simple with an experienced advisor at your side.
Include all government support
Currently, many companies have significant government assistance to cover wages that must be included in SR&ED applications, such as the Canada Emergency Wage Subsidy (CEWS) and Industrial Research Assistance Program (IRAP). Claimants must deduct the amounts from their SR&ED expenditures as government assistance.
Recently, the Canada Revenue Agency (CRA) revised technical requirements to make the application process more easily understood. This will help your advisor work with you to make sure the technical work lines up with CRA’s expectations.
On paper, this might sound like a deceptively easy process, but that isn’t always the case. It’s important to be prepared to defend the claim and have the right information on hand to ensure the application meets the science eligibility criteria and is supportable when subject to a review.
Helping you make things happen
The SR&ED tax credit is one of the best programs in the world to lower a company’s financial burden when developing new technology, taking on bolder projects, reducing financial risk and staying competitive. Whether it’s agriculture, cannabis, life sciences, information technology, engineering, or manufacturing, all industry sectors can take advantage of the cost-saving program if they are attempting to advance or develop a technology.
On a broader scale, this spells growth potential for Canada’s local industries—a shift that will also inspire further growth and development in these sectors through the expansion of the ecosystems’ talent pools.
Jason Boblinski is a Senior Manager, SR&ED Technical, with national accounting firm MNP, working with clients across the prairies. For more information, contact Jason at 204.336.6188 or email@example.com.