The Canadian R&D tax credit schemes was set up in the 1980’s to encourage business to engage in research and development. There are two main benefits of the scheme namely:
- You can pool your R&D expenditure and deduct the against your current year income or keep them to use in future years
- You can earn R&D tax credits (ITC) and use them to deduct your income tax payable. If you have any unused ITC’s then you may be able to carry them back 3 years or forward 20 years. In some instances, the CRA can refund the remaining ITC.
There several thresholds that determine the level of ITC and whether this is refundable or non-refundable.
For a Canadian Controlled Company (CCPC) the rate corporation can earn a refundable ITC calculated at 35% of the qualified expenditure up to $3m. Over $3m the corporation will earn ITC at a rate of 15% of the qualified expenditure of which only 40% is refundable. For a non-CCPC the ITC is a flat non refundable 15% of the qualified expenditure.
In order to qualify for the ITC the work must be conducted in Canada and fall under of the following headings:
- Basic Research: This is for scientific research for which there is no practical application in mind i.e. university research
- Applied Research: This is for scientific research where there is a practical application in mind
- Experimental Development: This is for any research designed to increase the technological knowledge base this would include developing new products or processes or improving existing ones. The information required to solve a problem cannot be within your current knowledge base.
If the R&D work falls under one of the three headings, then a further five questions must be answered in order to ascertain whether the work can be considered Scientific Research and Experimentation. The five questions as noted by the CRA are:
- Was there a scientific or a technological uncertainty;
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty;
- Was the overall approach adopted consistent with a systematic investigation or analysis;
- Was the overall approach undertaken for the purposes of achieving a scientific or a technological advancement;
- Was a record of the hypotheses tested and the results kept as the work progressed.
If the answer to the above questions is yes, then SR&ED occurred.
Corporations who have engaged in SR&ED works may be able to claim the following as eligible expenditure:All Posts
- Directly employed and directly engaged employee costs
- Directly employed persons conducting supervisory or support function for the research
- Overhead directly related the research
- Materials used (and cannot now be re-used) in the research
- Payments to third parties where they were engaged to assist in the research (80% of cost is claimable)
There are two methods that can be used when calculating the total expenditure, either the traditional method which requires you tracking each expense or the proxy method which is a simpler method as you don’t have itemize and track all your overhead expenses.
Alongside the federal scheme most provinces and territories offer their own SR&ED scheme. The two schemes work together, the provincial tax credit is calculated first federal rate is used on the remainder. In summary the rates are as follows:
- Alberta: 10% refundable tax credit
- British Columbia: 10% refundable tax credit if a CCPC, if not then the tax credit is non refundable
- Manitoba: 20% partially funded tax credit
- New Brunswick: 15% refundable tax credit
- Newfoundland and Labrador: 15% refundable tax credit
- Nova Scotia: 15% refundable tax credit
- Ontario: 8% refundable Ontario Innovation Tax Credit & a 3.5% non-refundable Ontario Research & Development Tax Credit
- Quebec: There are number of different rates for CCPC’s. For CCPC’s whose assets in the previous year did not exceed £50m may be able to claim 30% of qualifying expense (the first $50k of qualifying expense is excluded) up to $3m after which the rate decreases to 14%. For companies with assets in the previous year of between $50m-$75m the excluded amount increases on a linear scale from $50k to $225k and the percentage rate decreases on a linear scale from 30% to 14% up to $3m where thereafter the rate is 14%. For companies that had assets of $75m or over in the previous year the threshold is $225k and the rate 14%. For non CCPC’s there the same thresholds apply but there is a flat rate of 14%.
- Saskatchewan: 15% non-refundable tax credit
- Yukon: 15% refundable tax credit
Below is an illustration of a construction company who has incurred $225k of qualifying expenditure developing a product or process or improving an existing one.
| Qualifying Expenses | ||
| Employees directly employed | $100,000 | |
| Supervisory and support staff | $20,000 | |
| Materials consumed | $50,000 | |
| Overhead expenses | $15,000 | |
| Third Party costs (80% of $50k) | $40,000 | |
| Subtotal (allowable expenses) | $225,000 | |
| Tax Credits | ||
| OITC @ 8% (refundable) | $18,000 | |
| Revised subtotal of allowable expenses | $207,000 | |
| ORDTC @3.5% (non-refundable) | $7,245 | |
| Revised subtotal of allowable expenses | $199,755 | |
| Federal – ITC @ 35% (refundable) | $69,914 | |
| Total refundable Tax Credits: | $87,914 | |
| Total non-refundable Tax Credits: | $7,245 | |
| Total Tax Credits | $95,159 |
Urban Project Services works in partnership with senior management, project teams and accountants, to undertake the time-consuming research and complexities required to identify, assess and document qualifying SR&ED needed to make a claim under the scheme.
This article contains information of general interest about current legal and accounting and tax issues and does not provide legal or accounting or tax advice. It is prepared for the general information purposes only. This article should not be relied upon in any specific situation without appropriate legal, accountancy or tax advice.
