The SRED Program
Here is some great news for technology companies. Canada, and in particular British Columbia, may be the best region in the world in which to set up a technology venture because of the very generous research and development tax credits.
The Canadian government gives away well over $1.5 billion each year to companies (and other taxpayers, too) who do research and development work - which, by definition, means technology companies. This is called the Scientific Research and Experimental Development Program or SRED for short. For current, up-to-date information on this very useful program, please visit the Canada Customs and Revenue Agency's (CCRA) web site at http://www.rc.gc.ca/sred/.
And, it's a refundable credit. This means that if you have no revenue and/or are not profitable yet, you can get the credit back in cash! That's right. The Feds send you a cheque! In British Columbia, that can amount to as much as 68 cents back on every incremental R&D dollar spent! Many people are under the false belief that the credit is much smaller and may not be worth the effort. Please read on.
Generally, Canadian-controlled private corporations (CCPCs) with less than $200,000 in taxable income can receive a refundable investment tax credit (ITC) of 35% (68% after the gross up - see below for the math) of qualifying SR&ED expenditures, to a maximum of $2 million of expenditures. Most other Canadian corporations, proprietorships, partnerships, and trusts can receive an investment tax credit of 20% of qualifying SR&ED expenditures. Note: Individuals, i.e. proprietorships, can even claim this - great for hobbyists who are doing weird science in their basements!
So, for every $1.00 you spend on research and development including an overhead allowance. you get up to $.35 back in either CASH or a tax credit from the federal government. That's like having a 35% silent partner in your business - only better. Public companies and non-CCPCs, such as foreign controlled corporations, do not get quite this much. They are limited to a 20% grant. But, that's still pretty darn good!
But, there's more!
The government allows you to claim overhead on your R&D expenditures. If you have a dedicated R&D facility, this is easy to do, but if R&D is part of your overall operation, the calculation of overhead can be cumbersome. Therefore, you main claim
an overhead "proxy" which amounts to 65% of your direct cost. Therefore, if you hire an R&D employee and pay her $100K during the fiscal year, you can actually claim the 35% grant on your total cost of $165K (i.e. $100K X 1.65).
Certain provinces, such as British Columbia (as of Sept'99), also provide a provincial SRED credit. In the case of B.C. for example, the Province provides an additional 10% credit. So for every incremental R&D dollar spent, a total of $.68 can be recovered, taking into account the provincial and federal credits on the overhead topped-up direct R&D cost. Here's how the calculation works:
SRED Claims, including B.C. Credit:
The following applies to a CCPC (Canadian Controlled Private Company)
Company pays $100 for Research (e.g. Salary)
Company Payment= $100
65% Overhead Proxy= $65
65% Overhead Proxy= $65
TOTAL R&D: $165 (same as for a CCPC)
BC Portion: 10% of $165= $16.5
Fed Portion: 20% of ($165-$16.5)= $29.7
TOTAL non-refundable Tax Credit= $46.2 (i.e. equal to 46.2% of dollars spent)
How to Apply
Any taxpayer can apply - companies or individuals. You apply simply by filling in a form (see CCRA Form T661 ) that is part of your annual tax filing, i.e. submitted with the T2 or T1 income tax return. However, you can file SR&ED claims as late as 12 months after your filing due date for the year in which the SR&ED expenditure was incurred. It is quite straightforward. You only need to "prove" that you spent the money on R&D (e.g. white lab coats, black lab notebooks, an element of risk or uncertainty, etc). Note that routine engineering or product development type work does NOT qualify. R&D, by definition, involves some degree of risk or uncertainty and the SRED program helps in overcoming that risk or uncertainty. The CCRA web site will help you get a better understanding of what qualifies and what doesn't.
Actually, there's a Catch-22 here. To raise the initial capital, companies try to convince investors that there is little risk - i.e. give us the money and will do the R&D and be successful. But then, to get the SRED funding, companies have to convince government that there really was a risk or element of uncertainty! It's a balancing act!