Tax Articles
Look at your R&D ASAP
Business Times
Sandy Hale
Did you know that you might be missing out on thousands of dollars in tax credits for your business?
To encourage greater productivity among Canadian businesses, the federal and provincial governments offer some of the most generous research and development 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 business performs any R&D activities, you should be aware that qualifying R&D is often part of the daily business activities of many small businesses
Three basic criteria must be met if an activity is to qualify as R&D under our tax rules; the terms used to describe these criteria may sound complex, but the criteria themselves are straightforward.
1. Scientific or Technological Advancement
This simply means that you must be trying to create something new -- a new product, for example – or even an improvement to an existing product. Moreover, you don’t have to be successful in order to receive R&D tax benefits. It is the attempt to achieve an advancement that is necessary; failure to achieve objectives also increases existing knowledge and is therefore considered to be R&D.
2. Scientific or Technological Uncertainty
There must be an element of uncertainty in your endeavour. This means that you are unsure as to whether your goals can be achieved, or there is uncertainty as to the method by which you can attain your objectives -- and this uncertainty would be removed by performing R&D.
3. Scientific and Technical Content
Basically, this means that your research must be conducted in an orderly fashion with documentation to support the work performed. The Canada Revenue Agency expects that a knowledgeable person should be able to "repeat" the research that you did.
Businesses receive three important benefits when they qualify for R&D incentives.
- All qualifying R&D expenditures, including capital expenditures, can be deducted immediately for tax purposes.
- You can "pool" R&D expenditures and either write them off immediately or defer claiming them indefinitely.
- Your business is eligible for investment tax credits (ITCs), which reduce your income tax liability dollar for dollar. Should available credits exceed income tax, you may be able to claim ITCs as a cash refund from the government. For most taxpayers, the ITC rate is 20%. However, if you carry on your R&D activities in a Canadian controlled private corporation, you may qualify for an enhanced ITC rate of 35%. Any ITC you receive will reduce your R&D costs in the taxation year following the year in which the ITC is claimed. This will reduce the pool of R&D expenditures that you can deduct for tax purposes in the future.
These are the federal incentives; the Ontario government offers additional incentives. For example, you can deduct from Ontario taxable income the amount of federal ITCs claimed in the preceding taxation year. The Ontario deduction is limited to the portion of the federal ITCs that can reasonably be considered to relate to Ontario R&D expenditures. As well, an Ontario Innovation Tax Credit (OITC) is available to CCPCs that qualify for the enhanced 35% federal R&D investment tax credit rate. The OITC is a refundable tax credit of 10% of R&D expenditures incurred. This refundable credit applies to 100% of current R&D expenses and 40% of R&D capital expenditures. The credit reduces eligible R&D expenses for federal purposes and therefore reduces the federal R&D ITCs.
To claim R&D tax incentives, you must complete and file with your corporate tax return: Schedule 32 to the corporate tax return: Claim for Scientific Research and Experimental Development Expenditures Carried Out In Canada (also known as form T661). To calculate your R&D ITCs, you must also file Schedule 31: Investment Tax Credit. To qualify for benefits, you need to file the forms within one year after the filing due date for the taxation year in which the R&D expenditures were incurred; for corporations, this is 18 months after the taxation year-end.
Be sure you don’t miss an opportunity to receive these lucrative R&D benefits; contact your accountant to help you determine whether you have qualifying business activities and to help you complete the necessary forms.
Sandy Hale, CA, is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Sandy in the Mississauga office at 905-270-7700 or shale@bdo.ca.
