By Andrew Shalit and Wing Man Lau of KPMG’s SR&ED Tax Practice.  Visit http://www.kpmg.ca/en/services/enterprise/issuesTaxR&DIncentive.html for details.

Canada’s Scientific Research and Experimental Development (SR&ED) program is one of the country’s largest tax incentive programs. It is intended to create a supportive environment for Canadians to carry out research and development (R&D). The program has existed in one form or another for over 50 years. Any individual or corporation carrying on qualifying R&D activities in Canada can participate in the program.

Each year, Canadians file over 11,000 SR&ED claims, resulting in over $1.6 billion of tax savings. Is your company claiming everything it deserves?

Many companies are surprised to find out that they are eligible.

Virtually any company involved in activities beyond the mere distribution of goods may be eligible to claim tax benefits under the SR&ED program. You may be surprised to learn that you may have already completed work that meets the definition of qualifying SR&ED activities, and that you are entitled to a sizeable sum of unclaimed cash.

What qualifies?

For your company’s activities to be eligible for the SR&ED program, it must meet the following three requirements:

1. must have scientific or technological uncertainty,
2. must seek a scientific or technological advancement, and
3. must use scientific methodology in attempting to resolve the uncertainty.

Scientific or technological uncertainty means it is unclear how a technological problem will be solved. Either the solution is unknown or it is unclear which of several possible approaches will satisfy the technical objectives. Scientific or technological advancements must not include routine work; the knowledge sought must be a technological advancement to the company, as well as to the technical community. The project must be conducted in accordance with the principles of scientific method, usually involving trials, experimentation, or even prototyping. It does not include trial and error, or random effort. Even if technical objectives have not been met (i.e., the project was unsuccessful), the project may still be eligible for SR&ED.

To take advantage of the SR&ED incentives outlined below, you must file a complete SR&ED claim with your income tax returns within a specified time frame. A complete claim includes two equally important components:

1. a narrative technical submission describing the SR&ED work performed, and
2. the completed prescribed tax forms.

Your company must file its claim no later than 18 months after the end of its fiscal year, regardless of whether it has already filed its corporate tax returns.

Eligible costs under the program include salaries and wages, contract payments, materials consumed or transformed in the R&D process, most new R&D-related capital expenditures, leased equipment and overhead.

Determining actual eligible overhead costs can be a difficult and timeconsuming process. A simplified method of calculating eligible overhead, called the “proxy” method, allows you to simply use 65 per cent of qualifying salaries as overhead. In many cases, the proxy method achieves greater financial benefits than quantifying and claiming the precise amount of overhead allocated to SR&ED activities.

What’s in it for you?

Your company may fully deduct both the current and capital R&D expenditures noted above. Alternatively, the deductions can be deferred indefinitely at your discretion.

Every dollar spent on qualifying expenditures also generates investment tax credits (ITCs). Canadian controlled private corporations (CCPCs) that meet specific criteria can receive refundable ITCs at a rate of 35 per cent. The ITCs are fully refundable in cash (within certain limits), even if your company has no tax otherwise payable.

All other corporations earn nonrefundable ITCs at a rate of 20 per cent. These tax credits can be applied against taxes otherwise payable. If your ITCs exceed your income tax, you can carry back the excess credits and apply them against income tax in any of the three preceding years, or carry them forward for use in the next ten years.

Most provinces in Canada have their own R&D programs that are designed to top up benefits received under the federal system. For instance, in Ontario, you can get almost 66 per cent of your qualifying costs back in cash. These federal and provincial tax benefits combine to make Canada’s R&D system one of the most generous tax incentive programs in the world.

Are you eligible?

Ask yourself the questions below. If you find yourself saying “Yes” to some of them, then you may be eligible for SR&ED ITCs.

1. Is time being spent developing new ways of doing things?
2. Are you enhancing/adapting processes using science or technology to gain efficiencies or improvements?
3. Are there failed projects?
4. Do you use staff or consultants in an engineering capacity for example, software development, process engineering, product development, etc?
5. Are you investing resources to develop better products?
6. Are there cost or schedule overruns?
 Tax Ideas

Find out more about Scientific Research and Experimental Development (SR&ED) Tax Incentive Program at http://www.cra-arc.gc.ca/txcrdt/sred-rsde/menu-eng.html.