Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
Canada’s Scientific Research and Experimental Development program (SR&ED) is a federally-funded program administered by the Canada Revenue Agency which, through tax-incentives like tax credits and cash refunds, rewards businesses of all sizes and in all business sectors for conducting scientific research and development projects. The Scientific Research and Experimental Development program is an effort to encourage the advancement of Canadian products and processes to help keep Canada competitive in an-ever changing global market.
Those who qualify for this program can apply for tax credits to cover expenses such as materials, machinery, equipment and wages. Here we will take a closer at the SR&ED, including who qualifies and for how much, along with what criteria must be met.
Scientific Research and Experimental Development Program: Who Qualifies?
Investment Tax Credits
Most businesses conducting scientific research and development in Canada may qualify for the investment tax credit. A Canadian-controlled private corporation can apply for a tax credit of up to 35 percent of the initial $3 million invested in these projects and an additional 20% on any additional amount. Others, including Canadian corporations which are not CPCCs, sole proprietorships and partnerships can earn a 20% tax credit on expenditures relating to SR&D.
Only qualified Canadian-controlled private corporations are eligible to receive a full portion of their tax credit as a cash refund, and then only if their taxable income did not exceed the business limit in the preceding year and only after applying the tax credits to the taxes payable.
Other Canadian corporations, while not eligible for a cash refund, can apply the tax credit to taxes payable, and certain sole proprietorships and trusts may receive a partial cash refund after applying the credit to taxes payable.
The term “research and development,” as it relates to business practices, is one we hear quite frequently, but what exactly does it mean, and more specifically, what does it mean in this case?
A leading business and investment publication defines research and development as “a process by which businesses conduct investigative activities to either improve existing products and procedures, and/or help with the development of new products and procedures.” This general definition can also be applied to the Scientific Research and Experimental Development program, only with particular attention paid to the word “scientific.” Only those projects “which advance the understanding of scientific relations or technologies, and address scientific or technological uncertainty” will qualify. Moreover, the investigations must be systematic and performed by qualified personnel. The projects which qualify under the SR&ED program might include:
- Experimental Development. The advancement of technologies aimed at the development of new products, equipment and procedures or the improvement of existing ones.
- Applied Research. Systemic research aimed at scientific advancement with a specific application in view.
- Basic Research. Scientific research with no specific application in view.
- Support. Support personnel and resources with a direct link to the research and development activities.
According to the Canada Revenue Agency, the following projects will NOT qualify for tax credits under the Scientific Research and Experimental Development Program:
- Experiments or research in the Social Sciences or Humanities field
- Market research and experiments
- The routine, non-developmental testing of products or procedures for the purpose of quality control
- The commercial production and/or use of a particular product, material or device
- Prospecting activities such as mining and specimen collection
- Style changes
- Any research or experiments based on routine or non-experimental engineering practices
Is There Assistance Available?
The Canada Revenue Agency provides a number of tools and services for both existing and new claimants under the SR&ED program. Among these are:
- Public Information Seminars. Seminars addressing every phase of the SR&ED program
- Eligibility Self-Assessment Tool (EAST). This tool is used to measure whether or not the R&D work performed has the potential for eligibility under the program.
- First-time claimant information. A step-by-step guide to help you with the entire application and claim process.
- Tax tools. Help with filling out the T661 claim form.
- Pre-claim Reviews.
- Personalized account-executive services
- Claimant service for those accepted and rejected for the SR&ED program
To make a claim under the Scientific Research and Experimental Development Program, businesses must file an income tax return, application T661—the Scientific Research and Development Program Expenditures Claim form and either form T2 Schedule 31 for corporations, or T2038 (IND) for individuals. For corporations, claims must be made within 18 months following the tax year in which the expenditures occurred, and 17 and a half months for individuals.
For individuals or corporations seeking additional information about the Scientific Research and Experimental Development program you can visit the Canada Revenue Agency website or for filing help, order a copy of T4088—A guide to form T661.
If you need help with your SRED claim please feel free to call me at 250-661-9417 and I can help walk you through the process.