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    Incentive Program

What You Don't Know About SR&ED Can End Up Costing You Hundreds Of Thousands Of Dollars




What You don't Know About SR&ED Can End Up Costing You Hundreds Of Thousands Of Dollars

By Gerry Fung

SR&ED- many businesspeople have not heard of it before, and those that have heard about the program don't believe that they will qualify. In actuality, many businesses can and do qualify for government tax incentives that can total up several hundreds thousands of dollars! Your competitors are likely taking advantage of the tax incentives from this program to reinvest in new product lines, more staff, and improved facilities. Thus, what you don't know about the SR&ED program can end up costing you.

What is the SR&ED program? SR&ED stands for Scientific Research and Experimental Development. The purpose of the federal SR&ED tax incentive program is to encourage research and development in Canada. The program awards up to a 35% tax credit on eligible research and development expenses. In 2006, the federal government awarded over $6 billion in incentives to Canadian businesses- this makes it one of the most generous government assistance programs in the world!

Typical claims for the SR&ED program are usually in excess of $100,000. For example, if your company spent $1 million on research and development expenditures in the past 2 fiscal years, then you could be eligible for up to a $350,000 cash refund!

SR&ED tax subsidies are available to Canadian companies as follows:

Public corporations and foreign-owned companies: 

  • 20% tax credit
Canadian-Owed Private Corporations: 
  • Taxable revenues from previous years > $400,000: 
    • 20% tax credit 
  • Taxable revenues from previous years < $200,000: 
    • 35% cash payment 
  • Taxable revenues from previous years in between $200,000 and $400,000: 
    • Sliding scale between 20% tax credit and 35% cash payment

In order to apply for the SRED tax credit, eligible activities must first be identified. The first requirement for eligibility is that all claimed work must be performed within the geographical boundaries of Canada. Furthermore, the Canadian Tax Act defines SR&ED eligibility as follows:

  1. The activity must demonstrate technological uncertainty in a field of science, above and beyond a technological baseline.
  2. The activity must demonstrate a technological advancement in a field of science.
  3. The activity must exhibit systematic and experimental development.

In short, the government is looking for work which advances a scientific knowledge base in a technical manner. However, qualifying work does not necessary have to be lab research. In fact, the CRA stipulates that in addition to basic research, applied research, experimental development, and supporting activities can also be claimed as valid SR&ED expenditures.

What some businesspeople overlook is that during the course of regular business development, technological advancements can often be achieved. If you are creating a new product or process, or improving an existing product or process, it is quite possible that certain activities may meet the 3 aforementioned criteria. It is quite plausible that the processes involved with in-house experimentation, that were conducted in order to improve an existing product, can actually exhibit technological uncertainties.

For example, let's assume that you are creating a new single-piece tail-light that combines both red and amber colours. If the existing capabilities require that each colour be moulded as a separate part, then the optimum timing of the resin injection for both colours is unknown, and is thus, a technical uncertainty. Systematic experimentation would have to be conducted in order to determine the effects of temperature and cure time on the final product.

Unfortunately, if you do not file within 18 months of your fiscal year end, the potential return from SRED tax credits is forever lost. The only sure way to find out what is eligible for the SR&ED program, and to get your claim filed on time, is to contact a SRED consultant (http://www.northbridgeconsultants.com). SR&ED consulting agencies are able to provide the services of an engineer, who would then be able to (1) help assess SR&ED eligibility, and (2) assist with the preparation of technical documents necessary for filing. If you're unsure about whether you qualify for the SR&ED program, don't miss out on a huge source of cashflow. After all, it can never hurt to obtain a free SR&ED consultation (http://www.northbridgeconsultants.com).















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    Incentive Program