The Scientific Research and Experimental Development program offers generous tax incentives for individuals and corporations engaged in certain types of research and development. The program covers a range of activities, and if you qualify, it can lower your tax liability and potentially result in a refund.
Individuals, trusts, and corporations can all qualify for this program. If you are part of a partnership, you can also qualify, but you apply on your individual tax return using your portion of the partnership’s eligible expenses.
What Research and Development Expenses Are Eligible?
As indicated by its name, this program is expressly for scientific research and experimental development. This includes basic and applied research you can include research done just for the advancement of science, but you can also include research done with a practical application in mind. Experimental development includes working on technological advancements to improve materials, devices, products, or processes. For instance, developing new materials to fill potholes could fit into this category. Educational development doesn’t include market research, quality control, routine testing of your products, research in social sciences or the humanities, prospecting for oil, or the commercial production of new materials. If your work falls into one of the eligible categories, you can include salary, materials, overhead, capital expenses, and various other costs related to your research or development activities.
What Does the Program Offer?
The program offers a twofold tax benefit.
- You can deduct eligible expenses from your income. If you have $100,000 in income and $5,000 in eligible SR&ED expenses, the expenses lower your taxable income to $95,000.
- You can claim a tax credit based on your eligible expenses.
How Much Is the SR&ED Tax Credit?
For Canadian controlled private corporations, the credit is worth 35% of eligible expenditures up to $3 million. The part of the credit that’s based on capital expenses is only 40% refundable, but the rest of the credit is completely refundable. If you have qualifying expenses that exceed the $3 million mark, you can claim a non-refundable 15% credit on those costs. If your corporation is not a CCPC, your credit is 15% of eligible expenses, and it’s nonrefundable. As an individual or a trust, you can also earn a 15% credit. If some of the credit is left over after you cover your income tax due, you can get a refund of 40% of the remaining amount.
What Are Upcoming Changes to the Program?
The SR&ED program is popular; about 24,000 individuals and businesses submit a claim every year. Between 2016 and 2019, the Canada Revenue Agency plans to overhaul the program to speed up and streamline the application process. As part of that effort, the program started offering a pre-approval process to businesses in early 2016. That makes it easier to include the credit in your financial plans without having to wait for a formal approval. The government also plans to extend outreach so that more people know about the program. The CRA is implementing a quality assurance program to improve consistency across the board. All of the changes that the CRA plans to bring to this program promise a faster, easier process for individuals and business owners. If you think your work may qualify, you may want to start gathering receipts and descriptions of your work. The deadline for applications is 17.5 or 18 months after your tax return due date, so you have plenty of time.