Research and Development Tax credits are offered by governments to incent private companies to carry out increased amounts of R&D. In Canada, R&D tax credits are awarded through the SR&ED program. R&D tax credits in Canada are some of the largest in the world.
Research and Development Tax credits are offered by governments to incent private companies to carry out increased amounts of R&D. It is well understood economically that increases in research and development spending lead to productivity growth. Productivity growth is a key driver in economic growth overall. Economic growth leads to increased employment, increased exports, and can lead to less reliance on resource extraction and low added-value industry verticals.
Private firms often underspend on R&D because they are focused on maximizing short term profits and short-term economic opportunity. This means that government incentives for private research and development can have a multiplier effect on economic growth if they are well-designed and well applied. A second advantage of government incentives for private research and development is that it is a substitute for direct government-funded R&D.
Economists see advantages in leaving the decision making for research and development spending in the hands of private enterprise. This avoids the often-seen problem of the government “trying to pick winners” by funding R&D work and companies directly for specific projects.
R&D tax credits in Canada are awarded through the Scientific Research and Experimental Development Program (SR&ED). SRED is a 3-Billion-dollar program, given to 20 000 companies annually to incentivize the creation of Canadian jobs.
The SR&ED program exists to incentivize Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. While basic research does qualify for SRED, most claims fall under the experimental development part of SR&ED. Federal government statistics show that 95% of credits are awarded for experimental development work (i.e., not classic R&D work).
The process of creating new products or services, carrying out IT projects, failed projects, prototyping, and bringing new technologies to bear in a business are all experimental expenditures that may qualify for SR&ED.
A common barrier to SR&ED is the perception that it is for large multinational companies only. This is completely false. The ideal company for SR&ED is a small business (known as a CCPC or Canadian Controlled Private Corporation) as the credit rates are higher for these firms vs public or multinational companies. Credits are also delivered as cheques for small businesses instead of as non-refundable tax deductions for larger companies.
Now that we have established the criteria for SR&ED and the ideal size of company, what is the big deal? How big of a difference can SR&ED actually make for a company in Canada? The answer is a huge difference.
Canadian small businesses can actually receive credits of up to 70% of spend on salary, and 40% of spend on materials and subcontractors. This may seem hard to believe at first, and the natural question would be why this is not talked about constantly by the government of Canada? Put simply, the government is not in the business of giving money away, yet because the government is in the business of creating Canadian jobs, the program exists, but it is not front and center for many people in general industry.
Once companies know about the power of the SRED Program, it can change the way you think about growing your business. If you know that the government will pick up half of a new project’s cost, you will be more likely to plow ahead with that work. If you know that the government will pay up to 70% of the cost of new engineering staff, you may be much more willing to hire staff and take on new technically risky jobs. You might hire a new computer guru rather than apply a band-aid and outsource two more critical IT jobs to China.
G6 Consulting can work with you to show you how SRED can accelerate your business goals and your business’ growth. We are not here to maximize your 2019 or 2020 FYE SRED claim. We are here to help you maximize the SRED funding you receive over the next ten years.
Check our our SR&ED overview page to learn more about SR&ED and how to qualify
Contact an Expert for a free no obligation consultation to see if your business can qualify
Check out our S&ED calculator to get an idea of how big your SR&ED cheque could be
When you think of Canadian Tax Credits, make sure you think of SR&ED