There is no program as large and robust in supporting innovation and R&D in Canada as the SR&ED tax incentive program. Businesses of all sizes are encouraged to apply, and SR&ED tax credits are available to all sectors. It is a massive funding source that can benefit business processes. Any qualifying business would be well-advised to apply for SR&ED tax credits.
A SR&ED tax credit is calculated based on your expenses on a qualifying project. Some qualifying expenditures include salary or wages for employees’ time directly engaged with SR&ED work, materials procured for the project or transformed during it, certain overhead costs, subcontractor fees, and third-party payments.
SR&ED claims are submitted along with your yearly income tax return. While preparing your tax return, this is the time to prepare your SR&ED claim. The primary form for SR&ED claims is Form T661. Whether you’re a corporation, partnership, individual, or trust, there are additional forms to fill out and include with Form T661. These documents must be filled out accurately, truthfully, and completely to minimize the chances of being denied.
Here are the 12 best benefits of SR&ED tax credits:
Benefit #1: SR&ED promote innovation and growth
From the government’s standpoint, the SR&ED program has successfully promoted competitiveness in industries. It led to increased growth across many sectors. Plus, the program created highly skilled R&D jobs while supporting Canadian companies.
Benefit #2: SR&ED supports small businesses
For small and medium-sized companies, obtaining financing for R&D and new product or process development is difficult. There are very limited funding sources, but through SR&ED, significant financial support is available.
Benefit #3: SR&ED is generous
SR&ED in Canada promises companies up to 40% in refundable tax credits and sometimes more. If one compares Canada’s SR&ED program to similar programs internationally, the US provides about 10%, and the UK does 25%, France has a 30% R&D tax credit, and China is limited to 12.5%. If you’re a foreign-controlled corporation, doing your R&D and innovation in Canada appears much more attractive.
Benefit #4: Any work conducted in Canada is applicable
SR&ED tax incentives prioritize supporting Canadian-controlled businesses. However, foreign-controlled businesses can still apply. If they do, one must ensure the entirety of the work they’re claiming was performed in Canada.
Benefit #5: Many small businesses can qualify
Every year, more than $3 billion in SR&ED tax credits are given to more than 20,000 businesses. It’s not difficult to qualify for SR&ED funding so long as one has an eligible project and the claim forms are completed.
Benefit #6: SR&ED is a form of non-dilutive funding
SR&ED tax credits take nothing from you. As a business operator or an investor, these tax credits can be a part of a financial strategy to obtain funding that does not dilute your ownership. This type of capital can help accelerate growth, recoup your investment in R&D, or spur other forms of business development.
Benefit #7: SR&ED tax credits are significant
There are SR&ED tax credits available at both the federal and provincial levels. The tax credits are significant, potentially reaching as high as a refundable tax credit worth 50% of all expenditures on qualifying SR&ED activities.
Benefit #8: SR&ED tax credits vary by province
While the federal SR&ED program has maintained a maximum of 35% for Canadian-controlled private corporations, the provincial rates vary quite a bit. For example, in BC, you have 10% maximum R&D tax credits, while Ontario has a maximum of 20%, Quebec has a maximum of 30%, and the Maritime provinces offer a fully refundable 15% flat. This might encourage you to do your R&D in specific areas to maximize your tax credit as a small business.
Benefit #9: SR&ED tax credits can be used in multiple ways
SR&ED tax credits can be applied in several different ways. They can be used as a deduction against income to reduce the taxes owed. They can also be used as an investment tax credit, or ITC, in both refundable and non-refundable formats. Your options will depend on the size and type of business you have.
Benefit #10: You can deduct your SR&ED tax credits in a future year
You do not need to use your SR&ED tax credits this year. You can use it in a future year, up to twenty years into the future. This allows you to bank these credits and maximize them to your unique tax situation.
Benefit #11: You can carry back SR&ED tax credits up to 3 years
If you don’t want to carry them forward, you can also carry your ITCs back up to three years, further reducing your tax payable and potentially generating a refund.
Benefit #12: You may get a refund from excess ITCs
If your ITCs exceed the tax payable for the year, you may find that you can get a tax refund. This amount can then be reinvested into your business and used to cover all associated costs with research and development.