2. 1
Why? The SR&ED is a popular tax measure for SMEs
What? The SR&ED provides broad-based R&D support, with targeted support for SMEs
Who? Benefits available through the SR&ED vary by type and size of business
How? Simple examples to show how the federal SR&ED works
Eligibility? There are a number of different activities that qualify for the SR&ED
Issues? The significant burden with preparing claims is a longstanding concern for SMEs
Changes? Further to the Jenkins Panel recommendations, Budget 2012 made
improvements to the SR&ED
3. 2
SR&ED is viewed as a cost-effective way to incentivize R&ED and promote ICT adoption.
SR&ED produces an 11% return on investment to the Canadian fiscal system1.
SMEs tend to invest proportionately more of their revenue in R&D than larger firms.
ICT accounts for 35% of private-sector R&D in Canada and SR&ED is often used by ICT firms2.
A company does not necessarily have to be profitable to benefit from the SR&ED.
There is a refundable component that provides ‘cash-in-hand’ to incentive R&D expenditures, a
key point for cash-strapped start-ups.
For very small start-up technology companies that are not yet earning profits, the SR&ED can
cover almost half of their R&D budgets and improve their working capital position.
Many smaller companies are bought and sold for the sole purpose of taking advantage of
accumulated SR&ED credits.
Provinces have similar tax incentives that complement the federal SR&ED (see Annex).
1 Source: M. Parsons and Phillips, “Tax Incentives for Scientific Research and Experimental Development,” Consultation Paper, Finance Canada, 2007.
2 Source: Information Technology Association of Canada, “The Issue: The Importance of the SR&ED to ICT R&D”, 2012.
4. 3
The SR&ED is the largest federal program for supporting R&D in Canada, and provides
over $3.1 billion in tax assistance to Canadian firms, including $1.37B in cash credits.
The rationale for the SR&ED is two-fold:
In the absence of the SR&ED, firms would perform less R&D than is optimal; and
R&D results in spillover effects that benefit other firms and sectors of the economy.
The SR&ED is particularly useful for SMEs and start-ups that conduct R&D to create new,
improved, or technologically advanced products and processes.
SR&ED expenditures can be applied as a deduction against business income taxes payable, with
any unused amounts carried forward indefinitely.
SMEs may also qualify for an investment tax credit (ITC) against taxes payable. Unused non-
refundable ITCs can be carried back three years and forward 20 years.
For small firms, after reducing taxes to zero, any remaining ITC may be refunded in cash.
5. Small and medium-sized Canadian-controlled private corporations (CCPCs) receive a fully
refundable ITC at an enhanced rate of 35% on the first $3 million in qualified SR&ED
expenditures, and a 40% refundable ITC on qualified expenditures in excess of $3 million.
If taxable income exceeds $500K, or taxable capital exceeds $10 million, access to the fully
refundable ITC is restricted (For example, the $3 million expenditure limit is reduced by $10 for
each dollar by which the prior year’s taxable income exceeds $500K).
Larger CCPCs with taxable income over $800K or taxable capital over $50 million cannot receive
the refundable ITC.
For non-CCPCs, the general ITC rate is 15% in 2014 and subsequent taxation years, and
they are generally eligible for a 40% refund.
Where a CCPC is part of a group of associated corporations, the annual expenditure limit
for purposes of calculating the ITC must be shared amongst the group of corporations.
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6. 5
A small CCPC has $4 million in SR&ED
expenditures (where the CCPC is not part of an
associated group of corporations).
The CCPC would receive a fully refundable ITC
at an enhanced 35% rate on the first $3 million
in qualified expenditures and a 40% refundable
ITC at a 35% rate on the additional $1 million
in expenditures.
Thus, the total ITC value is $1.19 million.
100% x $3 million x 35% = $1.05 million
40% x $1 million x 35% = $140K
Assuming the CCPC had no tax payable, the
entire $1.19 million would be paid out as a
refundable tax credit (credits are paid out 3-4
months after the tax filing date).
A medium-sized CCPC has $600K in taxable
income and $10 million in qualified SR&ED
expenditures.
The $3 million expenditure limit to access
the fully refundable 35% ITC is reduced by
10 x $100K = $1 million.
Thus, the total ITC would be $1.82 million.
100% x $2 million x 35% = $700K
40% x $8 million x 35% = $1.12 million
If the CCPC had $1 million in tax payable:
The ITC reduces tax payable to zero; and
The remaining ITC is then paid out as a
refundable tax credit of $820K.
7. SR&ED eligibility is assessed according to three criteria:
Scientific or technological advancement;
Scientific or technological obstacle/uncertainty; and
Scientific or technological content.
SR&ED activities must involve systematic investigation or search carried out in science
and technology by means of experiment or analysis.
Activities that qualify: Experimental development; applied and basic research; engineering;
design; mathematical analysis; computer programming; and testing.
Activities that do not qualify: Market research; routine testing and data collection; research in
social sciences or humanities; commercial production; and style changes.
SR&ED allows for firms to claim previously allocated spending on R&D (versus a
program like IRAP that is focussed more on the pre-activity R&D stage)
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8. While the SR&ED is an important incentive for Canadian corporations that carry out
internal R&D activities, many SMEs have raised concerns over the administrative burden
associated with filing claims.
Businesses must provide a record of the percentage of time their staff spent on eligible
activities, explain the R&D that was conducted, how it advanced its understanding of the
issue being addressed, and how the R&D helped it to overcome a technical obstacle.
Companies often use accounting firms to prepare SR&ED claims. They may also incur
significant legal expenses to prove eligibility of expenditures.
CRA is taking steps to reduce the tax compliance burden associated with the SR&ED,
including:
A pilot to assess the feasibility of a formal pre-approval process for SR&ED claims; and
Online and in-person services to help claimants better understand the program’s eligibility
requirements.
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9. The “prescribed proxy amount” used to compute overhead expenditures was reduced
from 65% to 55% of direct labour costs to limit instances where credits are granted for
overhead costs that exceed the actual costs incurred.
The percentage of contract payments used for calculating SR&ED credits was reduced to
80% to remove the profit element from arm’s length contract payments.
Capital was removed from the expenditure base, while other elements (salary & wages,
materials, overhead and contract payments, remain eligible). This change was met with
mixed reviews:
Capital expenditures were one of the most complex components of the SR&ED and so their
removal from the list of eligible expenditures simplified the claims process.
However, for firms that incur significant capital expenditures for R&D purposes, the loss of this
element has diluted the value of the tax measure for those firms.
The general ITC rate was reduced from 20% to 15% to address the issue of growing pools
of unused ITCs.
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10. R&D tax incentive Description Limits Availability Eligible Expenditures
Ontario R&D Tax Credit
(ORDTC)
Non-refundable 4.5% credit for
eligible expenditures
Can be carried back 3 yrs and forward 20
yrs to reduce ON corp. income tax
payable (but not to a tax year that ends
before Jan. 1, 2009)
Corps with a
permanent
establishment in
Ontario after Dec. 31,
2008
Expenditures eligible for the
federal SR&ED credits carried out
in ON
Ontario Innovation Tax
Credit (OITC)
Refundable 10% credit for
qualified expenditures (any
OITC in excess of tax otherwise
payable will be refunded)
Annual expenditure limit of $3M of
qualified expenditures phased out when a
corp’s taxable paid-up capital for
preceding tax yr exceeds $25M
(eliminated at $50M in capital). Limit
also phased out when taxable income for
the preceding tax yr over $500K but not
over $800K
Ontario Business Research
Tax Institute Tax Credit
(OBRITC)
Refundable 20% credit for
qualified expenditures (any
OBRITC in excess of tax
otherwise payable is refunded)
$20 million annual cap that must be
allocated within an associated group of
corps
Corps, incl. those that
are members of
partnerships (other
than specified
members) with a
permanent
establishment in
Ontario
Qualified expenditures on SR&ED
work performed in ON under
contract with eligible research
institutes
Quebec SR&ED tax
measures
100% tax deduction for current
and capital SR&ED expenditures
On Dec. 3, 2014, introduced new
minimum thresholds starting at $50K per
claim for SR&ED in QC. SR&ED spending
below a specified threshold that starts at
$50K are excluded for corps with assets
of more than $50M
Corps with a
permanent
establishment in QC
Expenditures eligible for the
federal SR&ED credits carried out
in QC
Refundable 17.5% SR&ED credit Expenditures for wages paid in QC
Refundable 35% SR&ED credits
Expenses pursuant to: university,
public research centre or research
consortium contracts; pre-
competitive research contracts;
and dues and fees paid to an
eligible research consortium
* Filing deadlines: AB–15 months after filing due date; Federal/BC/NS–18 months after corporate year-end; MA/YK/NL–12 months after filing due date
** For all regions except Newfoundland & Labrador, eligible expenditures are reduced by government and non-government assistance, but not the related
provincial credit. The provincial credit will also reduce the federal pool of deductible SR&ED expenditures and qualified SR&ED expenditures. In most cases,
any recapture will crease or increase provincial tax payable.
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11. R&D tax
incentive
Description Limits Availability Eligible Expenditures
Alberta SR&ED
tax credit
Refundable 10% credit on up to
$4M in eligible expenditures
--
Corps with a permanent
establishment in Alberta, for
SR&ED activities carried out in
Alberta after Dec. 31, 2008
Expenditures eligible for the
federal SR&ED credits carried out
in AB. For years ending after Dec
31, 2012, eligible expenditure is
amended to follow the federal
reduction in the prescribed proxy
amount
British
Columbia
SR&ED tax
credit
Refundable 10% credit for CCPCs
up to the $3M expenditure limit
Otherwise, 10% non-refundable
credit for qualified SR&ED
expenditures
Can be carried back 3 yrs and carried forward
10 yrs to reduce BC tax payable
Corps with a permanent
establishment in BC. Credit
has been extended to allow
corps that are members of
partnerships to claim their
proportionate share of the
partnership’s SR&ED carried
on in BC, for qualified
expenditures after Feb 20,
2007
Rules parallel the federal SR&ED
rules relating to the definition of
SR&ED, qualifying expenditures,
and the expenditure limit. SR&ED
expenditures must be carried out in
BC
Manitoba R&D
tax credit
Non-refundable 20% credit on
eligible expenditures incurred
after Mar. 8, 2005, and 15% on
eligible expenditures before Mar.
9, 2005
Refundable credit for eligible
expenditures after 2009 for
corps that work with eligible
institutes in Manitoba
Non-refundable credits can be carried back 3
yrs and forward 10 yrs for yr ending after
2003 and carried back 3 yrs and forward 7 yrs
for yr ending before 2004 and applied against
MA tax payable
Manitoba’s 2010 budget extended
refundability of the credit to in-house R&D
expenditures (not undertaken by an institute
in MB). Refundable portion is ¼ in 2011 and
½ in 2012.
Corps, incl. trust beneficiaries
or that are members of a
partnership with a permanent
establishment in MB
Effective Jan 1, 2014, eligible
expenditures amended to: follow
the federal reduction in the
prescribed proxy amount; not to
follow the federal change to SR&ED
provisions disallowing capital
expenditures; and follow the
federal reduction to 80% of the
claimable portion of contract
payments with exception of
contract payments to eligible
education institutions in MA
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12. R&D tax
incentive
Description Limits Availability Eligible Expenditures
Saskatchewan
R&D tax credit
Non-refundable 15% credit for
eligible expenditures before Mar.
19, 2009, and refundable 15%
credit for eligible expenditures
after Mar. 18, 2009
Effective for qualifying R&D expenditures
incurred on or after Apr. 1, 2012, the
refundable R&D credit for CCPCs is subject to a
max. annual limit of $3M qualifying
expenditures; qualifying expenditures in
excess of this annual limit and qualifying
expenditures by non-CCPCs will be eligible for
a 15% non-refundable R&D tax credit
Non-refundable credits can be carried back 3
yrs and forward 10 yrs against SK tax payable
Corps, incl. trust beneficiaries or
members of a partnership, with a
permanent establishment in SK
Expenditures eligible for the
federal SR&ED credit carried out
in SK
Yukon R&D tax
credit
--
Corps with a permanent
establishment in YK at any time
in the yr, individuals that are
resident in the YK on last day of
the yr, incl. trust beneficiaries
and members of a partnership
Expenditures eligible for the
federal SR&ED credit carried out
in YK
Nova Scotia
R&D tax credit
Fully refundable 15% credit on
eligible expenditures
--
Corps, incl. those that are
beneficiaries of a trust or that are
members of a partnership, with a
permanent establishment in NS
Expenditures eligible for the
federal SR&ED credit carried out
in NS
Newfoundland
& Labrador
R&D tax credit
Fully refundable 15% credit on
eligible expenditures
--
Taxpayers, incl. corps and
individuals, beneficiaries of a
trust, and members of a
partnership, with a permanent
establishment in NL
Expenditures eligible for the
federal SR&ED credit carried out
in NL
New
Brunswick
R&D tax credit
Fully refundable 15% credit on
eligible expenditures after Dec.
31, 2002, and 10% non-
refundable credit on eligible
expenditures before Jan. 1, 2003
Non-refundable credits can be carried back 3
yrs and forward 7 yrs
Corps, incl. trust beneficiaries or
members of a partnership, with a
permanent establishment in NB
Expenditures eligible for the
federal SR&ED credit carried out
in NB
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Editor's Notes
Note that of the $3.1billion, $1.73B relates to the non-refundable portion of the SR&ED and ITC, and $1.37B relates to the refundable 35% ITC.
Breakout of the non-refundable credit projected tax expenditures ($M) for 2014:
mhttp://www.fin.gc.ca/taxexp-depfisc/2014/taxexp1401-eng.asp#toc8
Note that for CCPCs that are part of a group of associated corporations, they must share the expenditure limit and SR&ED benefits.
To claim the SR&ED, a company must file CRA form T661 SR&ED Expenditures Claim with its T2 business income tax return.
The form shows the pool of unused SR&ED expenditures and deducts amounts from the prior-year ending pool balance, if any, to calculate the current year amount.
BDC was in the SRED preparation business because many of its smaller clients (10-20 employees) had difficult accessing services of other SR&ED preparers. BDC would identify eligible projects; prepare technical reports; and, assist with SR&ED submissions.
BDC’s SR&ED services were done in close collaboration with external consultants. There were approximately 20 tax service providers working with BDC. Of those, five were larger firms and accounted for roughly 65% of the SR&ED preparation fees.
BDC clients were not required to use its SR&ED services where the client was accessing other BDC services (e.g. financing through the Market Expansion Loan). However, BDC estimated that roughly 80-90% of its SR&ED tax clients also received BDC financing.
A key difference between BDC and other SR&ED consultants was that its SR&ED preparation fees needed to be paid in advance (BDC fees generally range d between10-20% of anticipated SR&ED credits).
BDC offered a guaranteed return and so the fees could be partially refunded where the SR&ED tax credits were lower than expected. Businesses were also allowed to borrow from BDC the amount required to pay the SR&ED preparation fees (using the same criteria as for its other loans, with an average interest rate of 6-8%). BDC did not ask for the SR&ED refund as collateral for the loan repayment.
On a trial basis, in fiscal year 2013, the BDC offered existing Market Expansion Loan clients an advance on SR&ED refunds for accrued and filed tax claims.