Although the past several weeks have been trying times for many small businesses across Canada, there is cause for optimism, but it’s not related to recent events.
If you own or work for a business based in Canada, you might want to check to see if you qualify for an innovative government program that can reduce your taxes. The federal Scientific Research and Experimental Development Program, known simply as SR&ED, provides a refundable tax credit to a wide range of small businesses, whether they’re registered as sole proprietorships, partnerships or corporations.
Many businesses qualify for this tax credit, which offers substantial tax incentives to companies that perform certain types of research and development. If it turns out that your business qualifies, the SR&ED program can lower your tax liability and possibly even result in a refund.
The program is the latest stage in the evolution of a program that was initially established in 1977 by the Government of Canada to encourage Canadian companies of all sizes and in all industry sectors to conduct scientific research and experimental development. Tax incentives can be provided as an income tax deduction, an investment tax credit (ITC) or in some cases, a refund.
According to Toronto’s Michael Majeed, a senior consultant at Arck Innovative Consulting Services, who advises companies of all sizes and types across Canada about how to take advantage of the program, more than $3 billion in tax incentives are provided by the government to more than 20,000 business owners each year. He says that the SR&ED, which is administered by the Canada Revenue Agency, is the largest federal program supporting business research and development.
So how can you take advantage?
Michael Majeed says that three types of research are recognized, and that your business can likely qualify if your scope of work includes one of them.
They are basic research, which is defined as work undertaken for the advancement of scientific knowledge without a specific practical application in view; applied research, which is performed to advance scientific knowledge with a specific practical application in view; and experimental development, which is work performed for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products, or processes, including incremental improvements.
Specific work qualifying for the SR&ED tax credit includes experimental development, applied research, basic research, and certain types of work in support of experimental development, applied research, and basic research. Support work can include engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research.
Majeed says that expenses related to SR&ED include employee wages and salaries for those directly involved in doing the work, overhead costs and materials. Not eligible are capital expenses like equipment and real estate used in performing this work. That said, capital expenses can be deducted as depreciation expenses.
To qualify, companies need to be able to show that they have invested in one of those types of research. And just about anyone can apply, from Canadian‑controlled private corporations to other corporations, proprietorships, partnerships, and trusts.
According to Michael Majeed, living in a country that supports entrepreneurship to such a degree is highly advantageous to business owners, who always look for opportunities to reduce their tax burdens. To learn more and to determine if your company, business or sole proprietorship qualifies, Majeed suggests contacting your accountant or tax attorney.