There are two different categories of tax credits for businesses in Canada, refundable and non-refundable tax credits.
Non-refundable tax credits are what often come to mind when people think of tax credits. These are, in the truest sense of the term, “credits” that can only be used to pay a tax balance owing to the government. If a business is profitable and generates a tax balance owing, non-refundable credits are of great value because they can be redeemed against that balance. If, however, a business is not profitable and does not incur a tax balance owing, non-refundable tax credits can not be redeemed. An important point to note is that non-refundable tax credits are not valueless if they can not be redeemed right away. These credits can accumulate and allow businesses to build a reserve of them such that once the business does become profitable at some point in the future, non-refundable credits earned in the past may be redeemed. However, if a start-up is projecting losses for 5-10 years before generating a profit, the business may not survive long enough to reap the future rewards of non-refundable tax credits.
Refundable tax credits fix this problem and are the best kind of tax credit. In fact, labelling refundable tax credits as tax credits is seemingly a misnomer as they do NOT need to be redeemed against a tax balance. When a business receives refundable tax credits, they will first be used to pay down any outstanding tax that the business owes. The remainder of the credits will be REFUNDED to the business as cash with no strings attached in the form of a cheque or direct deposit directly from the Canada Revenue Agency (CRA). Therefore, a better way to think of refundable tax credits is an unconditional grant from the government rather than a tax credit.
The largest tax credit program in Canada is the Scientific Research and Experimental Development Tax Credit (SR&ED or SRED, often pronounced SHRED). SRED incentivizes companies to conduct R&D work in Canada by subsidizing the employee, contractor, and materials costs that a business incurs when doing qualifying work.
The label of SRED as an R&D program is unduly intimidating to many businesses who do not think of the work they are doing as “research and development.” You don’t need to be in aerospace or employ scientists, engineers, or lab workers in white coats to qualify for this lucrative program. Regular companies performing innovative work in manufacturing, IT, engineering start-ups and agriculture may qualify. A good rule of thumb is that if any of your staff are engaged in solving a technological problem for which a solution is not readily available, there is a good chance that the work that they are doing is eligible for SRED credits.
For private companies in Canada, SRED is a REFUNDABLE type of tax credit that every business can turn into cash. For public companies, however, SRED is a NON-REFUNDABLE type of tax credit and requires businesses to have a tax balance owing to turn the credits into cash.
SRED is awarded in arrears. This means that a business makes an SRED claim after its fiscal year has concluded, and all eligible expenditures have been incurred.
The process of claiming SRED refundable tax credits for private companies in Canada is as follows:
The CRA can NOT pay out an SRED claim and then subsequently audit and deny the claim, so business owners can feel free to spend the spend their SRED money as they see fit and not need to worry about keeping a reserve in case it gets taken away.
G6 Consulting Inc is an SRED consulting firm with a 14-year track record of excellence solely focused on helping companies access the SR&ED Tax Credit Program. G6 is a full-service SR&ED consulting firm. We prepare your claim, complete all the paperwork, submit your claim, and handle all post-submission administrative duties until your claim is approved, paid, and finalized. We only get paid after your claim is fully approved and paid out to you.