SR&ED expenses: how much funding can your business take advantage of?

The Scientific Research and Experimental Development (SR&ED) tax incentives form a program offered by the Canadian government through the Canadian Revenue Agency (CRA) to all Canadian businesses. It is supplemented by provincial tax incentives which vary across provinces and territories.

Their fundamental objective remain identical : foster innovation in Canada and encourage Canadian businesses in their financial efforts when conducting R&D activities.

But how exactly does that work? And how much can your business benefit from it?

The twofold benefit of SR&ED

There are actually two simultaneous mechanisms at play through which Canadian businesses can benefit from the SR&ED incentives :

Claim a deduction against taxable income

The lesser known benefit of SR&ED allows businesses carrying out SR&ED activities to deduct the related expenses from their taxable income.

Nonetheless, it can be an extremely powerful mechanism as it allows a corporation to further reduce their tax liability for the fiscal year. In addition, the pool of deductibles can include expenses which cannot be included towards the calculation of the ITC.  

For instance, a calculated pool of SR&ED deductible expenditures of $100,000 would reduce the taxable income by the same amount, resulting in a reduction of the tax liability of $100,000 x marginal tax rate.

For companies in Ontario with a 38% corporate tax rate, this would represent an economy of $38,000 in taxes payable !

At Leyton, we help you take advantage of this overlooked opportunity by calculating the pool of deductible SR&ED expenses and preparing the required tax forms. And because our remuneration is not based on the deduction received, you get this benefit complimentary of our service !

Your business has little to no taxable income during the fiscal year? No problem! The deduction can be carried forward to future fiscal years to further reduce future taxable income. You may even elect to use only a portion of the deduction and keep the outstanding balance for the future !

What expenses can be included?

Our consultants will calculate the pool of deductible SR&ED expenditures based on the nature of your business and financial documents. The deductible expenditures can include:

Earn an Investment Tax Credit

In addition to the deduction against taxable income, SR&ED can also further reduce your taxes payable by providing an Investment Tax Credit (ITC). Depending on the nature of your business, this ITC can even be refundable, meaning that the exceeding balance not used to pay for taxes is given to you as cash ! This makes SR&ED a very advantageous program for companies that are in the early stages of their life cycle, still conducting research before generating revenue.

Nevertheless, SR&ED is almost equally as important for mature companies conducting research activities to improve their product, service, process.

The amount of ITCs is calculated as a rate of the eligible qualified SR&ED expenditures.

Qualified SR&ED expenditures x ITC rate = ITC

ITCs are offered at both the federal and provincial levels, with respective rates being cumulative. A Canadian-controlled private corporation conducting research in Ontario can be eligible to a 35% refundable rate federally, with an additional 8% refundable rate provincially and an extra 3.5% non-refundable provincial rate. In total, this may provide up to a 43% refund on your R&D expenses !^*

For instance, salaries of $100,000 related to eligible SR&ED activities could get you $43,000 in tax refunds !

What expenses can be included?

Our consultants will calculate the pool of qualified SR&ED expenditures based on the nature of your business and financial documents. The qualified expenditures can include:

Prescribed proxy amount (PPA)

Overhead cost incurred in the performance of SR&ED activities, such as office related expenses, utilities, cloud subscriptions and many other can be captured through the proxy method. This prescribed method by the CRA allows you to consider the total of your overhead cost to be equal to 55% of your eligible salary cost ! This means that, if you incurred $100,000 of salary expenditures on eligible SR&ED activities, an extra $55,000 can be added to the total pool of qualified expenditures ! This makes SR&ED a really powerful program for businesses that strive for innovation and research in Canada.

^* The exact amount of ITCs calculated can vary depending on applicable rates, calculation rules such as the proxy method and other deductions such as other government assistance received. For more information, contact us so we can determine the applicable rules to your specific case et provide a simulation of the credits you may be entitled to.

Still unsure about your eligibility and how much you can get?

At Leyton, we help you navigate the complexities of the SR&ED policies and guidelines to optimize your ITC return. Feel free to reach out to us for the assistance and knowledge of our expert consultants.