Found Money: Your Farming Activities may Qualify for R&D Tax Credits
Bruce Ball , Partner, BDO Dunwoody LLP
Grainews
May, 2008
Did you know that you might be missing out on thousands of dollars in tax credits for your farming business?
To encourage greater productivity among Canadian businesses, the federal and provincial governments offer some of the most generous research and development (R&D) tax incentives in the world. Yet only a small minority of eligible businesses apply for these credits.
Before you dismiss this opportunity because you don’t believe your farm performs any R&D activities, you should be aware that qualifying R&D is often part of the daily farm business activities such as those involved in breeding, nutrition and feed projects or even those related to custom equipment and energy research or innovations.
To take advantage of this “found money,” you should investigate whether your farming activities qualify for this program. To begin with, the program is available to organizations of virtually any size and in any sector. For those that qualify, the most important tax benefit is an investment tax credit, which reduces federal income taxes payable dollar for dollar. If the available credit exceeds the amount of income taxes owing, you may even be able to claim the remaining credit as a cash refund.
Investment Tax Credits are calculated as a percentage of the cost of R&D expenditures. Currently, Canadian-controlled private corporations can earn an investment tax credit of 35% on the first $3 million of qualified expenditures (including wages, materials, machinery, equipment, certain overhead and contracts) for R&D carried out in Canada, and 20% on amounts above that threshold. Other Canadian corporations, proprietorships, partnerships and trusts can earn credits of 20% of qualified expenditures.
Along with tax credits, there are two other important benefits of the SR&ED program.
- All qualifying R&D expenditures, including capital expenses, can be deducted immediately for tax purposes.
- You can "pool" R&D expenditures, which gives you flexibility in claiming these expenses for tax purposes. You have the option of claiming all, none, or a portion of your R&D pool in the current taxation year, or in any taxation year in the future. This is useful if you don't have sufficient taxable income to take advantage of the tax deductions now.
If your farm is developing a new product or process, improving an existing product or process, improving your production methods, or working to reduce the environmental impact of your operations, you just might be eligible.
Under Canada’s tax rules, R&D is defined as "a systematic investigation or search carried out in a field of science or technology by means of experiment or analysis." While this definition generates visions of scientists in white lab coats, most eligible R&D activities for small and mid-size businesses are integrated with your daily activities. These activities must meet the following three criteria to qualify for the federal government’s SR&ED program.
1. Scientific or Technological Advancement
There must be an element of scientific or technological uncertainty in your endeavour. This means you must be trying to create something new – such as a new product or process, or to improve an existing product/process. In other words, you should not be working on something that is already common knowledge. Moreover, you don’t have to succeed to qualify for R&D tax benefits. It is the attempt to achieve a scientific or technological advancement that is important in determining whether you are engaged in eligible R&D activities.
2. Scientific or Technological Uncertainty
There must be an element of scientific or technological uncertainty in the undertaking. This means that, at the outset, you are unsure as to whether your goals can be achieved, or you are uncertain that the method you are using will achieve your objectives. Conducting R&D would eliminate this uncertainty.
3. Scientific and Technical Content
The government requires that your project must be “a systematic investigation or search going from hypothesis formulation, through testing of the hypothesis by experimentation or analysis, to the statement of logical conclusions." Basically, this means that you must conduct your research in a professional manner, systematically and with supporting documentation.
Quick R&D Tax Credit Eligibility Test
Take this quick test to determine whether you have any activities that might qualify for R&D benefits.
- Have you developed a new product/process, are you in the process of developing one, or are you improving an existing product/process?
- Are you improving the methods by which you produce a product?
- Are you spending money on improvements with respect to the environmental impact (e.g. to reduce pollution or waste) of your agricultural operation?
Along with these financial incentives from the federal government, many provinces offer additional incentives. So, there are even more reasons to look into whether you’re carrying on R&D activities.
To claim federal R&D tax incentives for a farm corporation, you need to complete Schedule 32, Claim for Scientific Research and Experimental Development Expenditures Carried Out In Canada, and file it with your corporation's tax return. The form requires a detailed explanation of your R&D project and the costs you are claiming as R&D expenditures. To calculate your investment tax credits, you must also file Schedule 31, Investment Tax Credit.
These forms must be filed within one year after the usual filing deadline for your corporate income tax return or 18 months after the end of the taxation year in which the R&D costs were incurred.
Once you file a claim, the Canada Revenue Agency will likely conduct an audit. In most cases, a science advisor will visit your operation to verify the information in the reports. A business auditor will also contact you to set up an appointment to review the financial side of the claim.
For this reason, professional assistance is a wise investment. An experienced professional can determine whether your farming activities are eligible for the R&D incentives, assist in establishing the appropriate documentation and filing the appropriate returns so that your claim is allowed.
The investment you make today will come back in generous “found money” tomorrow.
