Scientific Research and Experimental Development Tax Credit Program

Last updated

The Canadian Scientific Research and Experimental Development Tax Incentive Program (SRED or SR&ED) provides support in the form of tax credits and/or refunds, to corporations, partnerships or individuals who conduct scientific research or experimental development in Canada.

Contents

Background

Industrial tax incentives in Canada have been in place since at least 1944. A 1989 report prepared by Odette Madore, Govt of Canada Economics Division, summarizes the history of R&D tax policy. [1]

The SR&ED program is intended to encourage businesses of all sizes, particularly small to medium and start-up firms, to conduct research and development (R&D) that will lead to new, improved, or technologically advanced products, processes, devices, and materials. The Canadian SR&ED tax incentive is the government's largest single support program for R&D. Canada has one of the more generous R&D programs among OECD countries. [2]

[3]

"Each year the SR&ED program provides over $4 billion in investment tax credits (ITCs) to over 18,000 claimants. Of these, about 75% are small businesses." (CRA RC4472) [4] An expert panel appointed by the federal government recently recommended that the federal government consider redirecting some of the funds allocated to the SR&ED program to ensure that enough supports exist for larger businesses interested in taking innovations to the global market place. The SR&ED program produces less of an incentive as firms grow, since the maximum benefit any single firm can receive from the program is fixed, and not proportional to firm size.

SR&ED expenditures are deducted as business expenses, and may also qualify for investment tax credits that are received in the form of a reduction in income taxes payable, cash refunds, or both. Qualifying expenditures may include wages, expenditures for materials, equipment leases and overhead that are directly related to R&D, and 80% of the cost of eligible work by contractors. Capital equipment and equipment lease expenditures made after 1 January 2014, are not eligible. [5] The following activities constitute SR&ED: [4]

The following activities are not eligible for the SR&ED program: marketing & sales, routine testing, research in social sciences or humanities, commercial production, style changes, routine data collection, petroleum or natural gas exploration/drilling.

In order to claim such expenditures, an assessment on scientific or technological eligibility of the claimed activities needs to be performed, according to three criteria: [6]

The Department of Finance is responsible for the legislation that governs the SR&ED program. The Income Tax Act defines SR&ED. The Canada Revenue Agency (CRA) is responsible for its administration. The CRA Information Circular 86-4R3 is a key document that provides technical guidelines to clarify and interpret the language in the tax act. CRA Interpretation Bulletin IT-151-R4 is a key document that explains SR&ED expenditures.

Investment Tax Credit

Federally, the maximum Investment Tax Credit (ITC) depends on the company's legal status and amount of qualified expenditures for SR&ED carried out in Canada. [4]

In addition, each province or territory may also provide provincial or territorial tax credits (subject to a cap) to qualifying corporations carrying out SR&ED in their respective province or territory:

Provincial / Territorial Investment Tax Credits
Province/TerritoryRate
Alberta [8] 10%
British Columbia [9] 10%
Manitoba 20%
New Brunswick 15%
Newfoundland and Labrador [10] 15%
Northwest Territories  
Nova Scotia [11] 15%
Nunavut  
Ontario [12] 10%
Prince Edward Island  
Quebec [13] 30%
Saskatchewan [14] 15%
Yukon Territory 20%

Provinces and territories may offer alternative or supplemental investment programs. Examples:

Changes to Form T661

For tax years ending after 31 December 2008, CRA will only accept the new 2008 version of the Form T661. Significant changes include modifications to the “Part 2 project information” section that details the scientific and technological aspects of the SR&ED projects claimed, which has been restructured from free-flowing questions to a direct question format. [5]

In 2010, the CRA made minor revisions to Form T661 (10), to clarify some of the instructions and move the expenditure summaries from T661 Part 2 to a new summary section, T661 Part 6.

In 2013, The CRA made additional changes to the T661, where Consultants are now required to provide their agreement and the amount they charge to clients in return for filing claims on their behalf.

Self-Assessment and Learning Tool (SALT)

The SALT is CRA’s web-based tool that is used to determine through a series of concise questions if work performed has a likelihood of meeting SR&ED requirements for funding. [17] The SALT is mainly intended for potential claimants in the small to medium business sector, and for those who are new to the SR&ED program. SALT is an enhanced version of the previous tool, ESAT (Eligibility Self‑assessment Tool). [18]

The SR&ED Application Process

Canada Revenue Agency (CRA) and corresponding provincial tax authorities require all SR&ED claimants to submit their claim no later than 18 months after the effective fiscal year. For example, for a claimant with a fiscal year ending on December 31, 2018, it is required that the requisite documents are submitted no later than June 30, 2020. With that being said, CRA encourages taxpayers to submit their claims within a six-month time frame post-fiscal year-end, alongside their annual filings, because processing times for SR&ED tend to be much faster. In fact, if submitted within six months post-fiscal year, CRA reports [19] a 60-day turnaround for complete claims. Claimants who submit incomplete claims can expect longer processing times.

Some firms are in need of their SR&ED refund far sooner than the CRA can process their claim, therefore public and private lenders provide financing solutions to claimants. Public lenders tend to shape their financing terms on a firm's short-term and long-term assets, while private lenders will focus primarily on the firm's history with the SR&ED program, as well as the quality and strength of the claim in question. Given that the claim is secured by an anticipated receipt of a tax credit, firms can receive financing for both pre-file and post-file claims.

After submitting a SR&ED claim, [20] the group within the CRA processes the claim on a technical and financial basis. Technical reviewers are primarily concerned with determining whether the project meets the definition of SR&ED, while the financial reviewers focus on the eligibility of associated expenditures expressed in Canadian salaries, subcontractor fees, materials, and overhead. It is possible for a claimant to be reviewed or audited on the basis of technical or financial weaknesses. In either case, the claimant bears the burden of proof and is given an opportunity to defend their claim.

Given the possibility of review or audit by CRA, claimants are strongly encouraged to keep contemporaneous documentation that proves the advancement in a given area of science or technology, as well as associated expenditures. Contemporaneous documentation assumes that eligible SR&ED work is documented at the time the work was conducted. Retroactively documenting eligible SR&ED work is highly discouraged and increases a taxpayer's risk of having a claim reduced or even outright rejected. Examples of contemporaneous documentation include: [21]

See also

Related Research Articles

<span class="mw-page-title-main">Research and development</span> General term for activities in connection with corporate or governmental innovation

Research and development, is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existing ones. Research and development constitutes the first stage of development of a potential new service or the production process.

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state "discount" applied in certain cases. Another way to think of a tax credit is as a rebate.

The Low-Income Housing Tax Credit (LIHTC) is a federal program in the United States that awards tax credits to housing developers in exchange for agreeing to reserve a certain fraction of rent-restricted units for lower-income households. The program was created under the Tax Reform Act of 1986 (TRA86) to incentivize the use of private equity in developing affordable housing. Projects developed with LIHTC credits must maintain a certain percentage of affordable units for a set period of time, typically 30 years, though there is a "qualified contract" process that can allow property owners to opt out after 15 years. The maximum rent that can be charged for designated affordable units is based on Area Median Income (AMI); over 50% of residents in LIHTC properties are considered Extremely Low-Income. Less than 10% of current credit expenditures are claimed by individual investors.

The Canada Revenue Agency is the revenue service of the Canadian federal government, and most provincial and territorial governments. The CRA collects taxes, administers tax law and policy, and delivers benefit programs and tax credits. Legislation administered by the CRA includes the Income Tax Act, parts of the Excise Tax Act, and parts of laws relating to the Canada Pension Plan, employment insurance (EI), tariffs and duties. The agency also oversees the registration of charities in Canada, and enforces much of the country's tax laws.

<span class="mw-page-title-main">Medical research</span> Wide array of research

Medical research, also known as experimental medicine, encompasses a wide array of research, extending from "basic research", – involving fundamental scientific principles that may apply to a preclinical understanding – to clinical research, which involves studies of people who may be subjects in clinical trials. Within this spectrum is applied research, or translational research, conducted to expand knowledge in the field of medicine.

A tax incentive is an aspect of a government's taxation policy designed to incentivize or encourage a particular economic activity by reducing tax payments.

The official history of motion picture production in the U.S. state of Michigan dates back to the beginning of the Post–World War II baby boom. As of March 14, 2013, the Michigan Film Office website contains a list of 319, filmed in Michigan titles, beginning with This Time for Keeps, starring Esther Williams and in 1946, followed by Anatomy of a Murder, starring Jimmy Stewart and Lee Remick in 1959. Contemporary nationally known works filmed in the state include the drama Conviction (2010), starring Hilary Swank and Sam Rockwell, Kill the Irishman (2011), starring Val Kilmer and Christopher Walken, HBO's series Hung was filmed, and is set in, Detroit, and the Discovery Channel's Motor City Motors (2009), formerly Monster Garage (2002-2006). Originally slated for Minneapolis, Minnesota, Clint Eastwood's film Gran Torino (2008) was filmed in the Detroit area.

The Credit For Increasing Research Activities is a general business tax credit under Internal Revenue Code Section 41 for companies that incur research and development (R&D) costs in the United States. The R&D Tax Credit was originally introduced in the Economic Recovery Tax Act of 1981 sponsored by U.S. Representative Jack Kemp and U.S. Senator William Roth. Since the credit's original expiration date of December 31, 1985, the credit has expired eight times and has been extended fifteen times. The last extension expired on December 31, 2014. In 2015, Congress made permanent the research and development tax credit in a measure of the government spending bill.

The Qualifying Therapeutic Discovery Project Tax Credit was included in the Health Care Reform Bill to foster medical, life sciences, and biological innovation in the U.S. Many firms across the country could potentially be eligible for a Credit or Grant under this program. The Bill enables Treasury to allocate a maximum of $1 Billion in tax credits or grants to eligible companies. Treasury with guidance from Health & Human Services will accept, review, and certify applications. Potentially eligible companies should consult with their respective tax professionals to assess eligibility.

Modern United States wind energy policy coincided with the beginning of modern wind industry of the United States, which began in the early 1980s with the arrival of utility-scale wind turbines in California at the Altamont Pass wind farm. Since then, the industry has had to endure the financial uncertainties caused by a highly fluctuating tax incentive program. Because these early wind projects were fueled by investment tax credits based on installation rather than performance, they were plagued with issues of low productivity and equipment reliability. Those investment tax credits expired in 1986, which forced investors to focus on improving the reliability and efficiency of their turbines. The 1990s saw rise to a new type of tax credit, the production tax credit, which propelled technological improvements to the wind turbine even further by encouraging investors to focus on electricity output rather than installation.

<span class="mw-page-title-main">Movie production incentives in the United States</span>

Movie production incentives are tax incentives offered on a state-by-state basis throughout the United States to encourage in-state film production. Since the 1990s, states have offered increasingly competitive incentives to lure productions away from other states. The structure, type, and size of the incentives vary from state to state. Many include tax credits and exemptions, and other incentive packages include cash grants, fee-free locations, or other perks.

The Business Energy Investment Tax Credit (ITC) is a U.S. federal corporate tax credit that is applicable to commercial, industrial, utility, and agricultural sectors. Eligible technologies for the ITC are solar water heat, solar space heat, solar thermal electric, solar thermal process heat, photovoltaics, wind, biomass, geothermal electric, fuel cells, geothermal heat pumps, CHP/cogeneration, solar hybrid lighting, microturbines, and geothermal direct-use. This program is co-administered by the Internal Revenue Service (IRS) and the U.S. Department of Energy (DOE). The tax credits were expanded by the American Recovery and Reinvestment Act of 2009 and most components will last until December 31, 2016.

The economics of science aims to understand the impact of science on the advance of technology, to explain the behavior of scientists, and to understand the efficiency or inefficiency of scientific institutions and science markets.

Research and Development (R&D) Tax Credits are a UK tax incentive designed to encourage companies to invest in R&D. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.

The Research and Development Expenditure Credit (RDEC), introduced in 2013, is a UK tax incentive designed to encourage large companies to invest in R&D in the UK. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.

Creative Sector Tax Relief is a programme of tax incentives implemented in the United Kingdom in 2012 which encompass new incentives aimed at supporting the animation, high-end television and video game industries, in addition to the existing relief available for film production. The new reliefs are designed to promote culturally-relevant productions in the UK, to incentivise investment into UK productions that would otherwise take place outside the UK, and to support the necessary critical mass of infrastructure and skills in the UK for both today and in the longer term.

The Canada Workers Benefit (CWB) is a refundable tax credit in Canada. Introduced in 2007 under the name Workers Income Tax Benefit (WITB), it offers tax relief to working low-income individuals and encourages others to enter the workforce. The WITB has been expanded considerably since its introduction, and restructured in depth by the 2018 Canadian federal budget when it was renamed the Canada Workers Benefit.

A flow-through share (FTS) is a tax-based financing incentive that is available to, among others, the mining sector. A FTS is a type of share issued by a corporation to a taxpayer, pursuant to an agreement with the corporation under which the issuing corporation agrees to incur eligible exploration expenses in an amount up to the consideration paid by the taxpayer for the shares.

<span class="mw-page-title-main">Federal aid during the COVID-19 pandemic in Canada</span> National economic response to the COVID-19 pandemic

The Government of Canada introduced multiple temporary social security and financial aid programs in response to the economic impacts of the COVID-19 pandemic in Canada. The initial CA$82-billion aid package was announced on March 18, 2020 by Justin Trudeau.

The Research and Development Tax Incentive (R&D) is a government programme that aims to stimulate Australian investment in R&D. It has been in place since 1 July 2011 and replaced the R&D Tax Concession. The tax incentive reduces company R&D costs by offering tax offsets for eligible R&D expenditure. The tax incentive is jointly administered by Industry Innovation and Science Australia (IISA) and the Australian Taxation Office (ATO).

References

  1. ↑ "Scientific Research and Experimental Development Tax Policy" . Retrieved 2012-01-04.
  2. ↑ "Tax Incentives for Research and Development: Trends and Issues, published by the Organisation for Economic Co-operation and Development (OECD)" . Retrieved 2012-01-04.
  3. ↑ "Tax Incentives for Research and Development: Trends and Issues, published by the Organisation for Economic Co-operation and Development (OECD)" . Retrieved 2012-01-04.
  4. 1 2 3 "Overview of the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program" . Retrieved 2009-07-08.
  5. 1 2 "T4088 - Guide to Form T661 - Scientific Research and Experimental Development (SR&ED) Expenditures Claim" . Retrieved 2009-06-23.
  6. ↑ "IC86-4R3, Scientific Research and Experimental Development Information Circular". 1994-05-24. Retrieved 2007-08-14.
  7. ↑ "Federal SR&ED legislative proposals status as at June 30, 2014". 27 November 2019.
  8. ↑ "Alberta Scientific Research and Experimental Development Tax Credit" . Retrieved 2009-03-02.
  9. ↑ "Scientific Research and Experimental Development Tax Credit" . Retrieved 2013-06-20.
  10. ↑ "Finance - Scientific Research and Experimental Development". Archived from the original on August 22, 2006. Retrieved 2006-09-03.
  11. ↑ "Nova Scotia Research and Development Tax Credit" . Retrieved 2013-06-20.
  12. ↑ "Ontario Innovation Tax Credit" . Retrieved 2009-03-16.
  13. ↑ "Tax Credit for Salaries and Wages (R&D)" (PDF). Retrieved 2015-02-22.
  14. ↑ "Research and Development Tax Credit" (PDF). Retrieved 2006-09-03.
  15. ↑ "Alberta Science and Research Investments Program (ASRIP)" . Retrieved 2006-09-03.
  16. ↑ "TechPEI - Research and Development Initiative" (PDF). Retrieved 2006-09-03.
  17. ↑ "Canada Revenue Agency/Agence du revenu du Canada". 27 November 2019.
  18. ↑ "Canada Revenue Agency/Agence du revenu du Canada". 27 November 2019.
  19. ↑ "SR&ED Program Service Standards". Government of Canada. 28 December 2021.
  20. ↑ "SR&ED FAQ: How Does SR&ED Work in Canada?". R&D Partners. March 2018.
  21. ↑ "Claiming SR&ED tax incentives". Government of Canada. 24 December 2021.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.