What Is R&D Tax Credit: Research & Development Tax Credit
Does your company spend money on research and development? Innovation is how businesses stay competitive and bring new products and technology to market, but it does come at a cost.
The Canadian government implemented a research and development tax credit for companies that work on creating or improving processes and products during their business operations. If you conduct business qualifying R&D, you too could be taking advantage of it.
How do you know what an R&D tax credit is? Here is what you need to know:
What Is R&D?
R&D stands for research and development, and the Canadian government, through CRA, gives incentives with their SR&ED (scientific research & experimental development) program.
R&D refers to business activities that produce knowledge to further develop and market their products and services. When innovation comes through experimentation and development of new procedures with testing and overcoming scientific obstacles, this becomes an SR&ED project that can take advantage of the program.
Who Can Claim R&D Tax Credit?
If you have a Canadian-controlled or foreign-controlled company working in the country on qualified activities, you can claim expenses and earn investment tax credits. They can be in the form of a reduction in taxes, a tax credit or a cash refund. You can further pool your deductible expenses for use in the current or future years.
R&D Qualifying Activities
Not all company expenditures are eligible for the tax credit. It has to be a qualifying expenditure in one of three activities:
- Basic Research: The advancement of scientific knowledge without a specific purpose or application.
- Applied Research: The advancement of scientific knowledge with a specific purpose or application.
- Experimental Development: Working to achieve technological advancement through experimentation.
These activities must be through experimentation or analysis and be a systematic investigation carried out in a technological or scientific field. The sole purpose is to advance scientific knowledge and achieve technological advancement.
It is also important to note that experimentation and research aren’t required to succeed. It is the pursuit of SR&ED tax credit that determines eligibility, not the outcome.
Eligible R&D Work
To claim the tax incentive, work must be done in specific areas and directly support these three activities. They include:
- Operational research
- Computer programming
- Collection of data
- Mathematical analysis
- Operational research
While this may seem to cover everything, some work is not eligible. This includes:
- Quality control testing
- Sales promotion
- Market research
- Work within natural gas, petroleum or minerals such as prospecting, exploring or drilling
Expenditures claimed may include:
- Equipment lease costs
- Salaries and wages
- Third-party payments
- SR&ED contracts
There are also some expenditures which qualify that can be performed outside of Canada.
R&D Tax Credit Benefits
Canadian-controlled private corporations (CCPC) can earn an income tax credit of up to 35% for qualified SR&ED within their expendable tax limit of 3 million per year. Any other non-refundable ITCs beyond that come in at a basic rate of 15%. For qualifying corporations, 40% of that 15% is eligible for a refund.
Other corporations can earn the basic rate of 15% on qualified SR&ED expenditures for non-refundable ITCs they claim and use the ITCs to reduce their payable tax.
Proprietorships and trusts may claim a refundable ITC at the same 15% rate for their SR&ED expenditures but need to apply the ITC to their payable tax before getting a tax refund. It must be 40% of the unclaimed balance of ITCs earned in the year.
There are also provincial tax credits that you can apply for that vary in amount and qualifications and are based on which province you conduct business.
These benefits help fund scientific research and technological advances for companies to stay competitive and better position the company to conduct more SR&ED projects in the future.
Making R&D Claim
The process of making your claim takes time. If it is accepted as filed, expect it to be processed within 60 days. Some claims may require a review or audit. In this case, it will take up to 180 days. For any uncompleted claims or those in which CRA has asked for more information, additional time will be required.
This is a complicated tax program with new policies, which can be very confusing. While you are an expert in your field and work diligently to innovate in your sector, you can’t be a pro at everything. You need the skill set of a qualified SR& ED consultant that can explain what you need to do and help you through the process.
They know the tax laws and are very familiar with the filing procedure. Make sure to work with a consulting company to take full advantage of this great program to have more resources to continue your SE&ED activities.