Canada's Research and Development Tax Incentive

Canada's research and development tax incentive
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Canada’s Research & Development Tax Incentive

Canada is considered to have one of the more favourable tax incentives for spending on research and development (R&D). Here, we provide an overview of the scheme’s benefits.

Introduction

The SR&ED scheme is designed to encourage investment in research and development in Canada and, unlike some similar schemes in other jurisdictions, is available to businesses of all sizes.

The incentives come in three forms: an income tax deduction; an investment tax credit (ITC); and a tax refund. These benefits can be claimed not only be corporations, but also by trusts, members of a partnership, and individuals.

The scheme is administered by the Canadian Revenue Agency (CRA) and, according to the Government, over 20,000 businesses claim more than CAD3bn in tax support annually.

How The Scheme Works

There are two ways taxpayers can receive R&D tax benefits: either they can pool SR&ED expenditures and deduct them against current- or future-year income; or earn an ITC, which can be used to reduce income tax payable. In some cases, the CRA may refund the unused portion of an ITC. Unused ITCs may also be carried back to prior tax years.

Canadian-controlled private corporations (CCPCs) can earn ITCs at the ‘enhanced’ rate of 35 percent on qualifying expenditures up to CAD3m. This means they can receive a reduction in tax or a payout from the Canadian government of up to CAD1.05m. Additional tax credits are available for CCPCs with qualifying expenditure exceeding CAD3m, providing further tax savings up to CAD180k.

Foreign-controlled corporations can reduce their tax bills by up to CAD750k, using ITCs at the basic rate of 15 percent on qualified SR&ED expenditure up to CAD5m.

For partnerships, an ITC is generally calculated at the partnership level (rather than the individual level) and then allocated to eligible members, which can include individuals, corporations, or trusts.

Eligibility Criteria

To qualify for SR&ED tax breaks, the R&D in question may involve basic research, applied research or experimental development. Taxpayers are more likely to qualify if their work meets the following descriptions:

  • The work is conducted to gain new knowledge that helps to achieve an objective or resolve a problem.
  • The work is a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.

If the R&D work is considered to meet these eligibility criteria, a taxpayer may claim expenditures for salaries and wages; materials; contracts for SR&ED; overheads and other expenditures; and third-party payments.

Filing Requirements

To claim SR&ED tax breaks, taxpayers must provide the CRA with certain information on expenditures and the ITC earned on expenditure using a special tax form, which must be filed by a prescribed deadline. The deadline will depend on the category of taxpayer involved, but for corporations it will generally be 18 months after the tax year end.

Expenditure will not be considered eligible if the claimant has not met all the necessary filing requirements. It's therefore vital that taxpayers ensure their claims are filed in an accurate and timely manner.

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