Drawing a close on 2020, businesses across Canada will be counting the cost of the pandemic and all the obstacles it has thrown in their path.
Many companies will have put hiring on hold, laid off staff, postponed new products and put innovation on ice.
Others will have done the opposite, and used the pandemic as an opportunity to innovate more than usual.
Whatever the case, as the world emerges from the crisis next year, many business leaders won’t realise they can make faster progress than they think by taking advantage of an often overlooked government incentive for research & development to generate more value from work they have already done.
In Canada, one of the most important tax incentives is the Scientific Research & Experimental Development (SR&ED) program. We’ve seen claims for this type of incentive more than double in the past year as firms redouble efforts to ensure they’re claiming all the tax benefits owed to them. That is typical in times of economic stress.
In the past SR&ED has been widely misunderstood and businesses continue to underclaim. The tragedy for companies across Canada is that, in the wake of the pandemic, many will go out of business without realizing they were owed tens, maybe hundreds, of thousands of dollars.
How can businesses in Canada benefit from this boost in income?
SR&ED tax credits allow companies to claim back 35% of qualifying R&D expenditures, up to a maximum of $3 million in each tax year, and 15 percent for expenses above that amount. They will receive a cash payment or the claim will be offset against outstanding taxes.
SR&ED claims are usually split in two because there’s a federal and a provincial component. The 35% rate applies to the federal investment tax credit (ITC) and the local rate varies between provinces. Generally speaking though, SR&ED will typically return about 41.5% of a qualifying project’s R&D costs to a business, so it can be extremely beneficial.
Seasoned tax advisers with experience of SR&ED claims will know what qualifies. Essentially though, there are three simple tests that must be met for innovation to qualify for these incentives.
The work must:
● further technical knowledge or create advancement in their industry;
● overcome scientific or technological uncertainties; and
● follow a methodical approach consistent with systematic investigation.
Contractor costs qualify too, so companies using outside firms within Canada to carry out eligible work can still claim.
Examples of qualifying projects include:
- improving thermal capabilities or airtightness in the construction industry
- creating new navigation tools in the avionics sector
- and writing new automation software for the manufacturing industry
How can Canadian businesses make a claim?
Businesses can claim SR&ED up to eighteen months after the tax year in which the work took place and it costs firms nothing to establish whether they can claim as most consultancies charge contingent fees. This is where businesses pay a percentage of the value of the claim once successful. The SR&ED regime for SMEs in Canada has actually improved recently, so it’s just become even more generous.
Whatever the economic challenges still to come during this pandemic, making the most of the SR&ED incentive could make all the difference.
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