Benefits of SR&ED

Did you know that many types of businesses may qualify for SR&ED tax credits?

Canadian-Controlled Private Corporations (CCPCs) – Canadian-owned businesses subject to certain size tests may earn a refundable Investment Tax Credit (ITC) at the enhanced rate of 35% on qualified SR&ED expenditures of up to $3 million. Eligible expenditures beyond this threshold or for CCPCs not meeting the size tests attract a non-refundable ITC at 15%.

  • Other Corporations – Other corporations can earn a non-refundable ITC at a rate of 15% on qualified SR&ED expenditures.
  • Individuals and Trusts – Individuals and trusts can earn a non-refundable ITC at a rate of 15% on qualified SR&ED expenditures.
  • Members of a Partnership – The ITC is calculated at the partnership level, then allocated to eligible general partner members (individuals, corporations, or trusts).

There are many benefits to SR&ED tax credits in Canada:

The SR&ED program includes a refundable cash ITC to ensure small CCPCs with no or minimal tax payable would also benefit from the SR&ED incentive. The following table compares a large corporation with non-refundable ITCs with a small CCPC.

SR&ED is, in fact, a federal program, but the province or territory in which your business operates could have additional provincial R&D incentives that piggyback off the federal SR&ED program.

What Are Eligible SR&ED Expenditures?

LABOUR

Based on time spent on eligible activities in Canada; limited ability to claim work outside Canada for Canadian employees.

CONTRACTORS

Contractors portion of contract related to SR&ED performed on your behalf; must be Canadian contractors and work must be performed in Canada.

MATERIALS

Consumed (i.e., scrapped) and transformed, prototypes, trial materials; materials can be purchased from Canadian or non-Canadian suppliers.

OVERHEAD

Proxy method: 55% of (adjusted) labour costs. Traditional method: Must be directly related and incremental to the prosecution of SR&ED.

How Does SR&ED Impact Taxes?

Many Canadian businesses that are interested in claiming the SR&ED tax credit will ask, “How will SR&ED impact my business’s taxes?”

Taxes play a critical role in business finances and yet, to many, it is unclear how government initiatives like SR&ED impact your tax process.

ITCs must be included in a business’s income. What is not always clear-cut is how companies realize the benefit of the tax credit and when. This will rely on a variety of factors, including:

  • Is it cash, a reduction of taxes payable, or both?
  • What type of legal entity is the business?
  • What is the business size in terms of revenue and taxable capital?
  • In which province did the SR&ED activity occur?
  • Is the business achieving taxable income or not?
  • Is the SR&ED credit being stacked with other grants, such as the Industrial Research Assistance Program (IRAP)?

If your business is eligible for a SR&ED tax incentive, the classification of your organization will help determine the SR&ED benefit. If you own a CCPC, you can receive a refundable ITC of 35% on qualifying expenditures of up to $3 million or a non-refundable ITC of 15% on qualifying expenses more than $3 million. Depending on the location of your business, you may be eligible for an additional ITC on all qualifying expenditures.

Certain Canadian corporations may even qualify for a refundable ITC on expenditures more than $3 million. Non-Canadian controlled corporations may be eligible for a non-refundable ITC, while individuals and trusts may be entitled to a refundable ITC. The CRA calculates both at a rate of 15% on qualified expenditures.

You can also carry over any ITC you don’t want to use immediately in the current fiscal year to subsequent years up to 20 years in the future.