For Canadian businesses, the SRED tax credit program is something you should be well-versed in.
It’s a program that can earn you an investment tax credit, and you can also use your SRED credits to get access to working capital.
The following is a guide to what you should know about SRED credits.
What Is It?
The Canadian government at the federal level has a number of programs meant to encourage innovation, with funding often available through Research & Development. One of the programs is called the SRED Tax Credit Program, or you’ll sometimes see it as SR&ED.
It stands for Scientific Research and Experimental Development.
A lot of Canadian businesses don’t take advantage of the opportunities of this program, but it can be easily integrated into your business in a number of different ways.
The basic concept is that a private, Canadian-controlled corporation can earn an investment tax credit of up to 35% for the first $3 million in expenditures for research and development that are done in Canada. Then, there’s a 20% credit on everything else beyond that first three million.
It’s a refundable tax credit, so even if your business doesn’t turn a profit, you can get a cash refund.
In addition to investment tax credits, the tax incentives mean a full deduction in the year of your expenditures, even if they’re capital expenses. You can also carry the research and development deductions over if they’re in the current tax year.
It should be noted that a Canadian-Controlled Private Corporation is the only type of business that qualifies. This means that it’s a Canadian corporation privately held and controlled only by Canadian residents. It can’t be controlled by non-residents of Canada or a public entity.
These tax credits are open to any type of business that’s a CCPC, and in some cases, partnerships and sole proprietors qualify if they meet other project requirements.
Your work, to qualify, must be based on advancing technology or science. Specific types of work that could qualify for SR&ED tax credits include applied research and experimental development.
If you want to apply and qualify, your research and development project needs to be truly novel and shouldn’t be based on current knowledge that’s widely available.
Uncertainty should be a component of the research.
You also have to document all of your activities.
Your research and development itself does not have to be successful to qualify—it’s more about the experimental element.
The Qualification Process
What’s unique about these tax incentives is that you don’t have to create a proposal and then try and get approval in the traditional way. You can instead create your project and then make a tax claim.
You complete FormT661, Claim for Scientific Research and Experimental Development in Canada.
Then, you use the Tax Credit schedule and submit it when you file your income tax.
There are also similar incentives and credits available in individual provinces in Canada that you can use in addition to the federal incentives.
For example, in Ontario, there’s the Deduction for Federal R&D Investment Tax Credit. You may be eligible for this if you have work that qualified for the federal ITC in the previous tax year.
The Incentive Isn’t Just for High-Technology Businesses
There’s often the misconception that this program is only for tech businesses, and that’s not necessarily the case.
For example, in manufacturing businesses, you may qualify if you’re working on improving a current process or technique.
Another way you could qualify would be if you were working to reduce the environmental impact of your processes or products.
Just working on improving a current product or creating a software platform can also qualify you.
If your goal is to make a technological advancement and you’re doing so in a systemic way, you should look into the incentive.
Other Funding Opportunities
There are other Canadian opportunities available if your business is involved in research and development.
For example, there’s the National Research Council of Canada’s Industrial Research Assistance Program. Under this program, you may be able to access financial help for your research and development.
There’s also the Business Development Bank of Canada, which helps companies doing research and development through the process of identifying and applying for grants from the government, as well as accessing tax credits related to their work.
If you’re a qualifying Canadian business doing any kind of research and development, it’s certainly something to look into. You can also use your credit as a basis for receiving financing to maintain your cash flow.