How Does SR&ED Tax Credit Eligibility Work?
Taking advantage of the Canadian SR&ED tax incentive program makes sense for companies on the cutting edge of innovation. It supports businesses in the form of tax credits and refunds when they conduct scientific research and experimental development.
The SR&ED program is the largest single source of support to encourage research and development by the Canadian government. Typically, three types of businesses can enjoy the benefits of the SR&ED tax credit.
- Canadian-controlled private companies (CCPCs)
- Proprietorships, partnerships and trusts
- Other corporations (applied to taxes payable but non-refundable)
How do you know if your company can take advantage of this program? Let’s go over the SR&ED tax credit eligibility criteria works.
SR&ED Tax Credit Program
Some companies think that this tax incentive is for them but just restricted to high-tech businesses. Most companies are involved in research and development at different times. If your staff is trying to solve technical problems that aren’t available to them, they probably are eligible for SR&ED credits.
As long as the R&D takes place in Canada, has ownership of the intellectual property and has proof of money spent related to the claimed project, they can apply for the SR&ED tax credit incentive.
SR&ED tax credit eligibility
The government’s main objective with SR&ED is to make this incentive accessible. Through CRA, they are making it consistent and fair so claimants can take full advantage of all it offers and receive all that they are entitled to.
A company must meet various criteria to be eligible for the SR&ED tax credit:
There must be technical uncertainty.
A company may claim this tax credit when there is real uncertainty in solving technological problems within a project. It can’t be claimed because of monetary issues like costs to bring a product to market.
Your qualified staff needs to have issues with resolving problems and the solutions are not available, even though robust research. They apply their skills to the fullest extent, and there is no obvious solution to the outcome.
There must be a systematic investigation conducted.
A company’s goal is to overcome its technological uncertainties, and by systematically attempting to solve their roadblocks, they use what they’ve learned and apply new methods based on previous outcomes.
This results in a new course of action to overcome these obstacles to achieve a positive outcome. It must be systematic, as random attempts at solutions do not qualify for the tax credits.
There must be technological advancement achieved.
Resolving a technological issue can be daunting, and the strategic attempts to do so are considered an achievement. It is not the end breakthrough, but it is an advancement because they have proved the previous techniques did not work.
Technological advancement is achieved through failures, as you always move forward by eliminating what doesn’t work.
There must be scientific documentation and financial records
For qualification, a company must show their accumulated evidence for activities carried out to advance the research and development. There are costs incurred while attempting the progress and advancement that need to be shown to get the SR&ED credits.
SR&ED eligibility criteria
Some expenses included in the tax credit are wages and salaries for employees working on the R&D program, materials, and overhead. Capital expenditures like equipment, machinery, and buildings are not included, but the capital may be deducted from business income as a capital cost allowance or depreciation expense.
SR&ED eligibility is defined as:
Basic Research
This research is to advance scientific knowledge regardless of a particular application.
Applied Research
Research is done to advance gained scientific and technological knowledge through practical application.
Experimental Development
Work done to achieve technological advancement and improve and create new materials, devices, processes or products.
Directly Supported Work
Support work for basic research, applied research, and experimental development includes:
- Design
- Engineering
- Mathematical analysis
- Data collection
- Computer programming
- Operations research
- Testing
- Psychological research
Non-eligible for SR&ED tax credit
Some work may occur alongside the research and development that does not qualify for the tax credits under the SR&ED program. These include:
- Routine data collection
- Commercial production or commercial use of innovation
- Research in humanities or social sciences
- Quality control
- Market research
- Sales promotion
- Routine testing of devices, products, materials and processes
- Prospecting, exploring, drilling or producing natural gas, petroleum or minerals
- Style changes
Ultimately, suppose your company is developing new products and processes within the science and technology field and has to experiment to achieve its goal because available methods, information and processes can’t help. In that case, you can take part in the SR&ED program to help fund further R&D.
Understanding the minefield of information and criteria is not for the faint of heart. You are better served by soliciting the help of a qualified consulting firm that specializes in SR&ED tax credits. They can guide you in taking full advantage of this amazing Canadian tax benefit.
