A shred tax credit is another name for SR&ED tax credits. SR&ED is the ultimate Canadian government tax credit to help support eligible expenses for R&D performed in Canada. Businesses of all sizes and industries may apply so long as the SR&ED criteria are fulfilled.
SR&ED is significant in supporting Canadian companies conducting R&D in methods, processes, services, and products. More than $3 billion is given out every year, spread across some 60,000 R&D projects and 20,000 claimants. The SR&ED tax credit is meaningful for many businesses, giving them a necessary boost to their funding and research initiatives.
Here is your guide to SR&ED tax credits and how they work.
SR&ED Tax Credits Benefits
A non-refundable tax credit is an amount of money that gets subtracted from a corporation or individual’s taxes. Comparatively, there are refundable tax credits. When you are a corporation whose year has been unprofitable or is pre-revenue, these tax credits become reimbursements at your year-end.
The advantages of SR&ED tax credits are numerous. As a business, you have the chance to fund innovative projects that can provide you with an advantage in the marketplace. The SR&ED credits allow you to deduct R&D expenditures from income, reducing your taxes owed.
Furthermore, you also receive an investment tax credit, or ITC, which reduces taxes payable and can earn you a cash refund when the tax credit is greater than your tax liability.
What type of research qualifies for SR&ED?
Eligible SR&ED work must fit into one of the following categories: experimental development, applied research, basic research, or certain types of work supporting experimental development, applied research, or basic research.
The SR&ED program is designated to support projects with work targeting either scientific or technological advancement. To say it another way, your R&D project must be done to generate or discover scientific or technological knowledge that advances the understanding of science or technology. This must be supported with sufficient documentation, and the work itself must follow relevant processes to qualify for these tax credits.
Maximum Eligible SR&ED Funding
SR&ED funding is issued differently, depending on if you are a Canadian-controlled private corporation (CCPC), a business controlled by non-Canadian residents or controlled by a public corporation (non-CCPC). For CCPCs, you can receive a maximum of 69% of salaries, 36% of subcontractor fees, and 42% of materials covered, depending on the province. For non-CCPCs, the SR&ED tax credit will cover 43% of salaries, 22% of subcontractor fees, and 28% of eligible materials.
Supporting documentation for SR&ED claims is an absolute necessity. All SR&ED work must be identified and supported. The purpose of a project must be directly correlated with the SR&ED criteria. All technical processes and costs must be outlined, with narratives detailing each qualifying activity by the specifications outlined by the CRA.
How SR&ED ITC Works
The SR&ED refund is an investment tax credit or ITC. These are issued at the end of the tax year, totalling amounts earned from an SR&ED qualified expenditure pool, ITCs from a partnership or trust, ITCs carryforward and carryback, additional ITCs if you’re a CCPC, and any ITC earned on repayments. As an investment tax credit, an important note is that you can carry your SR&ED amount back for up to three years or can be carried forward for 20 years.
A CCPC can earn a minimum of 35% in investment tax credits for qualified SR&ED expenditures up to $3 million. This is 100% refundable. Above the $3 million threshold, a CCPC continues to earn ITCs but at 15%. Above the $3 million thresholds, only 40% of their SR&ED tax credit is refundable. This is a very simple way to explain the ITC.
Be sure to consult with an SR&ED expert to learn precisely what you can expect to receive in the form of SR&ED.
How to Apply SR&ED Tax Credits
SR&ED ITCs can either be applied this year, a past year, or a future year. On top of this, ITCs will reduce the amount of taxes owed to an applicant or can be provided as a cash refund depending on the applicant’s needs and how they are applying for the credit. This is a discussion with one’s accountant about making the most from their SR&ED tax credits.
Is SR&ED Considered Taxable Income?
Yes, the SR&ED investment tax credit refund is considered income earned the year after it is received. The amount claimed must be included correctly in parts of a taxpayer’s T2 and Schedule 1, Net Income (Loss) For Income Tax Purposes. If information is not properly inputted, it is likely to be flagged by the CRA. This is where an accountant or team skilled with SR&ED ITCs can help a great deal.