Helping your clients get the best possible tax refund is a big part of being a professional accountant. Whether you’re based in the Yukon, or work with business clients who are based there, you may want to invest some time into learning about the Yukon Research and Development Tax Credit. This credit is available to corporations and individuals, and is designed to assist and support businesses that are helping to drive technological innovation in the Yukon through scientific research and development.
What Is the Credit?
The Yukon Research and Development Tax Credit is an initiative put forward by the Canada Revenue Agency and the Government of Yukon’s Department of Finance to incentivize technological development in the Yukon Territory. The income tax credit allows for a refund of up to 20 percent of the amount of eligible spending made by corporations after June 30, 2000, and by individuals after Dec. 31, 2000.
For general technology research and development based in the Yukon, your clients can expect to be refunded 15 percent of their eligible expenses. However, if your clients have any eligible amounts payable to Yukon College, for example, if your client’s company utilized Yukon College research facilities or contracted faculty or students to assist with an experiment or study, your client’s credit amount may be increased to 20 percent of eligible expense amounts.
Who Is Eligible?
This tax credit is available to individuals who are or were permanent residents of the Yukon during the relevant tax year. For corporate taxpayers, the business must be, or have been, permanently established in the Yukon during the relevant tax year, and thus have income that’s eligible to be taxed according to both federal and Yukon tax law.
Permanent establishment usually means having a fixed place of business in a given location. A fixed place of business could be a long-term location like a shop, warehouse, or other facility with a fixed address, but it could also be a temporary field office or research installation.
There are also other circumstances where the definition of a permanent establishment is slightly more malleable. For example, say a corporation based in British Columbia regularly does business through a contract agent or broker who’s a permanent resident of the Yukon. If that agent has a reasonable amount of authority to contract through the corporation, the British Columbia-based corporation could legally claim permanent establishment, even if it doesn’t have a physical office in the Yukon.
This could also be the case if a nonlocal corporation regularly uses substantial equipment and machinery in the Yukon. Whether machinery is “substantial” is determined by the monetary value of the equipment itself, and the amount of the corporation’s gross income the machinery is responsible for earning. For example, a farm-equipment manufacturer based in Saskatchewan could claim permanent establishment if it outsourced the majority of its machine parts production to a factory in the Yukon.
What Expenditures Are Eligible?
Even if your clients are eligible for the tax credit, they still need to have spent money in research and development-related areas to be able to claim it. An eligible research and development expenditure is defined in the Canadian Income Tax Act as spending related to a “systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis”. Under these guidelines, eligible expenses could include any money put toward:
- Experiments and studies
- Basic and applied research
- Prototype development and testing
Whether your client’s expenditures fall into one, two, or all three of these categories, they must still be closely tied to science and technology. So, for example, if a company performed scientific research and used that research to create a prototype for a new technology, then any related expenses, such as materials, hours paid to contract researchers, and costs related to patents, would be eligible as expenses to be claimed for the credit.
Be careful to understand what’s not eligible, too, so you can help your client make prudent decisions about spending. Market research, routine data collection and testing, and research done in nonscientific fields like the arts and humanities are not eligible for the deduction.
Your clients can claim the Yukon Research and Development Tax Credit as part of their T-1 individual or T-2 corporate income tax claims. Individuals are required to file Form T1232, while corporations should file SCH 442. These forms are added to your client’s general annual tax return and may be filed by mail or electronically. A business must make a claim for the credit within 12 months of the filing due date for the tax year in which its eligible spending was recorded.
This tax credit is refundable only up to the point of matching the client’s taxes owed in a given tax year. It won’t alone result in a refund for your client, regardless of how much your client spent.
Among other possible avenues for government funding, the Yukon Research and Development Tax Credit is a great opportunity for businesses that have intellectual property they need to protect. Even if your client’s business is small, if it’s spending money on scientific research or prototype development, it could be eligible for the credit. Not only does the credit help to reduce the financial strain on newer businesses that are working in scientific and technological fields, but it might also provide your clients with the motivation they need to protect their property.