Research Can Generate Tax Benefits
April 19th, 2016
You may not know it, but your company could be involved in research or experimental development projects that qualify for valuable tax credits.
Those tax credits come under the Scientific Research and Experimental Development program, aimed at fostering new products and expanding markets. The tax benefits apply to companies and entrepreneurs in the industries of computer software, manufacturing, biotech, pharmaceutical, information technology, farming or food processing, forestry and mining.
The tax credits apply to such expenses as wages, materials, machinery, equipment, some overhead, and applicable contracts.
Investment tax credit rates vary depending on the size of the business. For small Canadian-controlled private corporations, a 35 per cent tax credit is available, which can be 100 per cent refundable on current expenditures, and 40 per cent refundable on capital expenditures. Other corporations earn 20 per cent in non-refundable tax credits. Many provinces offer additional incentives that can boost your benefits to as high as 60 per cent.
To be eligible the work must fall into one of the following categories:
- Experimental development to create, or improve, new materials, devices, products, or processes.
- Applied research with a specific practical application in view.
- Basic research without a specific practical application in view.
- Support work, which is limited to engineering; design; operations research; mathematical analysis; computer programming; data collection; testing; and psychological research.
To qualify, the project must:
- Advance the understanding of scientific relations or technologies.
- Address scientific or technological uncertainty.
- Incorporate a systematic investigation by qualified personnel.
Eligible work may be done either by you, or on your behalf, but it must be performed in Canada. When work is carried on both inside and outside Canada, only expenditures for work done in Canada will be eligible.
Certain research is specifically excluded from the initiative. For example, there is no tax credit for market research or sales promotion; quality control or routine testing; routine data collection; and research in social sciences or the humanities.
In addition to the tax incentives, there are a variety of government grant programs, usually under cost-sharing arrangements. For example, there is the Industrial Research Assistance Program, which provides grants to small and medium sized companies and covers a large percentage of eligible project expenditures.
It isn’t always clear whether a business is eligible for the credit. But, you may be in luck if your business is faced with a problem that cannot be resolved by current methods and you engage in research and development to find a solution. That type of project may meet the government’s criteria for the tax incentives.
Your tax accountant can help you determine if your work is eligible for these tax breaks.