Have you heard of the SR&ED tax credits? Are you wondering if you are eligible?
Before you can make a determination about eligibility, you should understand what SR&ED tax credits are, and whom they serve.
What is SR&ED?
The Canadian Scientific Research and Experimental Development Tax Incentive Program (SR&ED) provides support in the form of tax credits and/or refunds, to corporations, partnerships or individuals who conduct scientific research or experimental development in Canada. In fact, SR&ED is one of the most generous R&D tax incentive programs in the world.
The Federal Tax credit under SR&ED is a cash credit of 35% to a maximum of $3 million of qualified expenditures. Every year, SR&ED provides more than $4 billion in credits to nearly 20,000 claimants. It’s a significant program, and one that encourages scientific research and development throughout the country.
There are two benefits to SR&ED:
1. Recipients can deduct SR&ED expenditures from income for tax purposes.
2. SR&ED provides an Investment Tax Credit, which can be used to reduce Part 1 otherwise payable in the year.
Small businesses, tech start-ups and research organizations all take advantage of SR&ED, however, determining eligibility and completing the application process is not necessarily simple or straightforward.
What qualifies as SR&ED work?
In order to qualify, companies must be doing work that meets the definition of Scientific Research and Experimental Development in section 248(1) of the Income Tax Act.
SR&ED projects essentially fall into four categories:
• Basic Research consists of work that is intended to advance scientific knowledge without a specific practical application in view.
• Applied Research is work that is undertaken to advance scientific knowledge with a specific application in view.
• Experimental Development is work that is meant to achieve technological advances that create new (or improve existing) materials, devices, products or processes.
• Support Work directly supports and is commensurate with the needs of basic research, applied research, and experimental development in the following areas:
- Engineering
- Design
- Operations research
- Mathematical analysis
- Computer programming
- Data collection
- Testing
- Psychological research
What are the criteria for SR&ED projects?
Projects in any of these four categories must meet certain criteria before they can be deemed eligible.
Specifically, they must generate information that advances the understanding of scientific relations or technologies or, the project must be intended, from the beginning, to advance a certain technology or overcome a technological uncertainty.
The project must also demonstrate that it incorporates a clear and definitive scientific method. The work has to be supported by evidence to this end and must be performed by qualified people.
What SR&ED expenditures are eligible?
Even once your project meets the criteria and is deemed to be eligible, not all expenditures can be claimed. The following expenditures are eligible:
• Overhead
• Labour
• Subcontracting fees
• Materials
• Third party payments
• Capital equipment
If you would like more information about SR&ED tax credit eligibility, or you need help determining if you should apply, contact Miller Bernstein today.
