Small companies are missing out on Canada’s research and development tax credits - Kanada

Understand federal and provincial SR&ED tax credis and their eligibility

For small cash-strapped companies, finding a significant capital infusion can mean the difference between business growth and stagnation. Yet, despite the need for additional funding, each year thousands of Canadian businesses fail to take advantage of one of the most favourable refundable tax credits in Canada — the scientific research and experimental development (SR&ED) tax credit regime.

True, Canadian businesses already claim more than $1.5 billion in SR&ED tax credits each year. “However, thousands of other companies don’t make any SR&ED claims at all, or simply fail to maximize their eligible claims” says Natan Aronshtam of Deloitte.

Why are Canadian businesses leaving so much money on the table? Maybe because they believe SR&ED is confined to big companies or specialized industries like biotechnology or telecommunications. The good news is: that’s simply not true.

In Canada, SR&ED is defined as any systematic investigation or search carried out in a field of science or technology by means of experiment or analysis. To qualify for SR&ED tax credits, Canadian businesses must simply be engaged in basic research, applied research, experimental development, or support work. The following provinces also offer SR&ED tax incentives: Newfoundland & Labrador, Nova Scotia, New Brunswick, Québec, Ontario, Manitoba, Saskatchewan and British Columbia.

If you’re taking technical risks to come up with a technological advancement in your business processes or your products, your company may qualify for SR&ED tax credits – no matter what industry you’re in.

Despite knowing about the availability of SR&ED tax credits, many companies choose not to make a claim because they’re worried about the time commitment or don’t believe the effort will be worth the results. However, even a basic calculation shows that the tax credits can potentially be very significant.

Qualifying Canadian-controlled private corporations (CCPCs) can often receive a 35% tax credit, while other claimants can receive a 20% credit. Even more important for small companies, the tax credits are, in many cases, refundable.

Consider an Ontario-based CCPC with taxable income below $300,000 and taxable capital below $10 million. If this company performs eligible SR&ED activities, spending $250,000 on eligible salaries and $100,000 on contractors, it can receive a combined federal/provincial refund of approximately $213,000.

Best of all, as this example shows, qualifying expenditures aren’t limited to materials and equipment, but include salaries and wages, third party payments, SR&ED contracts, and even some overhead costs.

If your small business is looking for an intelligent way to save money and potentially receive a cash infusion in the form of a refundable SR&ED tax credit, you owe it to yourself to learn more about Canada’s innovative and flexible SR&ED tax regime.

Case study: R&D in the greenhouse industry

Think your business isn’t eligible for R&D because you don’t have a lab or engineers? Think again. “The program is available to all Canadian businesses that meet the eligibility criteria — even those in the agriculture industry” says Sherri Penner of Deloitte.

Take the example of ABC Greenhouses Inc. In its efforts to improve its cut flower crop yield, the company spends $80,000 on eligible SR&ED activities. The work includes internal labour, plants scrapped during experimentation, and consulting fees paid to a pesticide expert. An Ontario-based Canadian-controlled private corporation, ABC Greenhouses is entitled to a $46,687 refundable tax credit.