It is a program that encourages businesses of different sectors and sizes in Canada to conduct research and development in Canada. The tax incentives categories include; income tax deduction, a refund, or an investment tax credit. The program administration is by the Canadian Revenue Agency (CRA).
Persons qualifying for the program (SRED)
- Corporations – Canadian-controlled private corporations can always earn a refundable investment tax credit at the rate of 35% on expenditure qualified for the Scientific Research and Experimental Development program (SR&ED) of $3 million.
- Non-refundable investment tax credits are also attainable at a rate of 15% for amounts over $3 million. However, qualifying co-operations can earn refundable investment tax credit at a rate of 15% on amounts over $3 million, and 40% of investment tax credit (ITC) is refunded.
- For other co-operations, they can earn non-refundable investment tax credits (ITC) at a rate of 15% on scientific research and experimental development (SR&ED) qualifying expenditures. The investment tax credit (ITC) is to reduce tax payable.
- Individuals – they can always earn a refundable investment tax credit (ITC) at a rate of 15% on expenditure qualified for scientific research and experimental development (SR&ED). For a refund of 40% of the unclaimed investment tax credit (ITC) balance earned during the year, one has to apply for an ITC against tax payable.
- Trusts- similar to that of individuals
- Members of a partnership – Investment tax credit (ITC) cannot benefit partnership businesses and is therefore calculated at the partnership level and allocated to eligible members.
Tax incentive benefits of the SR&ED program
It has got three benefits as outlined;
- Pulling the Scientific Research and Experimental Development (SR&ED) expenditures and deducting them against the current-year income or the expense may be kept and deducted against a future year.
- Payable income tax reduction is achievable by earning Scientific Research and Experimental Development investment tax credits. Sometimes, the Canadian Revenue Agency can always refund the remaining investment tax credit.
- Fund scientific and technological advances to make a company competitive.
Unused investment tax credits (ITC) can always be carried forward to three or twenty years and applied against tax payable in other years.
Determination of the Scientific Research and Experimental Development eligibility
For a project to qualify for the SR&ED, it has to meet three criteria’s which are;
- Technological advancement-advanced technical knowledge
- Technological uncertainty
- Technical content- the iterative process must have been undergone to overcome uncertainties
The Canadian Revenue Agency determines whether a project is qualified for SR&ED by;
- Ascertaining whether there was a scientific or technological uncertainty that the standard practice or engineering could not eliminate. It means that the current technology advanced by extending its capability.
A manufacturer encountering the challenge of increasing volume to meet customer needs must perform research and development to advance the technology. He can always claim the time through the SR&ED program.
- Finding out whether the effort involved meant to formulate a hypothesis aimed at eliminating the uncertainty before the beginning of experimentation.
- They make sure that an adopted procedure is consistent with the discipline of scientific methods such as; formulating, testing, and modification of a hypothesis. That means that a challenge is identified, systematic investigations carried out, proof provided on non-achievability.
- They also ensure that the process resulted in scientific or technological advancement. The Canadian revenue agency looks for the results of an iterative process and its advancement to a company’s knowledge base. The advance has to be on a technical level.
- They check on whether the hypothesis record was tested and whether the results are kept as work progressed. The records are proof of work done.
The SRED aims to promote competitiveness, increase growth, create highly-skilled research development jobs, and promote international trade. It also ensures that businesses access the program and that its administered with fiscal integrity, and claimants access the full amount that they are entitled.