INNOVATION January-February 2013

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Canadian Innovation and the SR&ED Program Roz Seyednejad, P.Eng.

Investment tax credits are particularly attractive to Canadian-controlled private corporations that carry on qualifying SR&ED activities, as they may receive anywhere from 20% to 35% in credits. (See Table 1 for a more detailed look at available credit and refund rates.) Note that most provincial governments provide additional tax incentives, ranging from 4.5% to 37.5%. For example, the British Columbia and Alberta governments provide an additional 10%. For other corporations, including foreign-owned Canadian subsidiaries, the ITC rate is 20% of the qualified SR&ED expenditures and is non-refundable, but can be applied against corporate taxes payable. These refunds and tax credits allow your company to invest further into scientific research and experimental development, innovation, and advancement, offering a competitive edge in both national and international markets. The intent of the SR&ED Program is to encourage more engineering firms to perform more scientific research and experimental development, and take more risks. Canadian engineers are not short on ideas, but tend to be reticent to develop those ideas, and continue on to commercialize The SR&ED program is available to any business operating and carrying out R&D in Canada. Certain expenditures for performing SR&ED outside Canada are also permitted. The program is available to most taxpayers in Canada, including Canadian-controlled private corporations, individuals and trusts, public or private corporations, foreign corporations, and general partners of a partnership. Engineering firms in Canada have seen successful SR&ED claims in most sectors, including transportation, buildings, renewable power, mining, forestry, oils and sands, and more. SR&ED Defined CRA defines SR&ED, as given in subsection 248(1) of the Income Tax Act , as: This allows for a broader definition of research and development than simply conventional R&D, as is commonly believed. Most sectors of industry have activities going on at any given time that fall well within the CRA’s requirements for the SR&ED Program. Consider whether your company works to solve technological problems where a solution doesn’t already exist—that work may be eligible for the SR&ED program. A project doesn’t need to be deemed successful in order to qualify; plenty of important development comes from lessons learned during failed projects. Claimable SR&ED Work Because the very nature of engineering demands a great deal of innovation, development and advancements, engineering firms in particular often find that much more of their expenditures than they expect are actually claimable for SR&ED tax credits. successfully developed ideas. Who Can Make a Claim? “…systematic investigation or search carried out in the field of science or technology by means of experiment or analysis…to advance scientific knowledge or to achieve technological advancement…”

Innovation—an imperative component to national productivity— is largely driven by research and development work (R&D). The Canadian government has invested in an outstanding tax credit program designed to attract private-sector R&D, reward Canadian skills and ingenuity, sustain job creation and economic growth, and advance Canada’s position in a competitive global market. The Scientific Research and Experimental Development (SR&ED) Tax Credit Program is administered by the Canada Revenue Agency (CRA) and legislated by the Department of Finance. In 2011 alone, it provided $3.5 billion in federal investment tax credits to over 22,000 Canadian companies. Provincial tax credits added more than $1 billion to this total. Canadian engineering firms will find it in their best interests to fully understand this valuable program—one of the best of its kind in the world—and ensure they claim all eligible work and expenses. The program provides billions of dollars in investment tax credits each year to tens of thousands of Canadian companies for SR&ED-related expenditures, such as wages, materials, machinery, equipment, contracts and overhead. The federal government—along with most provincial and territorial governments—is committed to helping companies reduce the after-tax cost of their R&D work in the private sector and help fund future R&D endeavours. Could Your SR&ED claim is ideally submitted each year along with your income tax return; however, CRA allows 12 months after the tax return filing due date for the year in which expenditures were incurred. Your submission must include detailed technical information along with the necessary tax forms; thus, it’s vitally important to retain all supporting evidence and documentation for SR&ED work. CRA usually processes SR&ED claims within 120 days, unless they require and request more information from the claimant. Once a claim is processed, the investment tax credits (ITCs) received are generally applied first against the firm’s corporate taxes payable; some companies may be eligible to receive ITC amounts over and SR&ED benefits come through the income tax system in the form of tax deductions and tax credits. Tax benefits vary based on the type of company claiming and the type of expenditure being claimed, among other variables. Under Canadian tax law, the main benefits of the program include: 1. A full tax deduction in the year the expenditures are incurred. 2. The ability to pool SR&ED expenditures, which enables a taxpayer to carry over deductions indefinitely, to the extent that they are not needed currently. 3. Investment tax credits, which can in some cases be refundable in cash, or if non-refundable, may be applied to offset current or future corporate taxes payable. (Unused credits for a current year may also be carried back three years or forward 20 years.) your company be taking advantage of it? How the SR&ED Program Works above that as a refund (See Table 1). The Benefits to Your Company

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