Understanding the Rules
Small and medium sized enterprises (SMEs) may be entitled to receive tax incentives of 35% federally on the first $3 million of eligible expenditures for SR&ED activities carried out in Canada and 20% otherwise. For SMEs, all or a portion of these tax incentives may be refunded in cash even if there are no taxes owing. Large and even foreign-owned companies may also be entitled to receive the 20% federal tax credit for certain R&D activities carried out in Canada. Various Canadian provinces have parallel R&D tax incentive programs. For example, Ontario SMEs may currently be entitled to receive federal and provincial tax incentives of up to 73% on certain SR&ED expenditures. The refunds represent capital that you can put back into your business.
Realize Unclaimed Tax Incentive Benefits
You might not be aware of the substantial number of innovative activities your company is undertaking that could actually qualify for a refund. The CRA reports that “innovative activity” consists of “work that advances the understanding of scientific relations or technologies, addresses scientific or technological uncertainty, and incorporates a systematic investigation by qualified personnel." Essentially, you need to be working towards developing a product or a process that is “new or improved." The innovative activity does not have to be successful to qualify for the tax incentive. In fact, this is one time where failure isn’t completely a bad thing!
Your business may qualify for SR&ED if you:
- Improve your processing plant, production line, technology, or software
- Experienced projects with failures or unexpected roadblocks that needed to be resolved
- Employ technically trained personnel, whose activities involve innovative work
- Perform mining activities, mining related services, or mine decommissioning
- Develop mining remediation processes or devices
- Treat contaminated soil
- Attempt to reduce emissions, dust or noise
The SR&ED program is only one of many government assistance programs available to Canadian business owners and entrepreneurs to help grow your business. There are a whole host of other programs and grants that you can apply for to obtain funding to help you realize your businesses goals faster. A list of some of the available grants can be found on the Ministry of Northern Development and Mines website (www.mndmf.gov.on.ca) on the Business Services page.
Future Recommendations for the SR&ED Program
Recently an expert panel established to review the federal government’s support of R&D in Canada released a 148-page report, which consisted of a series of recommendations that calls for a simplified and more focused approach to the $5 billion worth of R&D Federal funding the government provides. Specifically, the panel recommends simplifying the SR&ED tax credit program by restricting the base for the tax credit for small and medium sized businesses to labour-related costs and has proposed raising the tax credit rate. While, the government’s response to the panel’s report remains to be seen, it’s worthwhile to conduct a review to see whether your company has identified and claimed all of your eligible tax incentive benefits for its innovations.
Laurie Bissonette is a Partner with KPMG Enterprise
in Sudbury, Ontario.