WHAT IS SR&ED?
The Scientific Research and Experimental Development (SR&ED) tax incentives encourage businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. It is the single largest investment tax credit program administered by the Canadian federal government through Canada Revenue Agency (CRA) providing Canadian businesses billions of dollars worth of tax credits annually. This amounts to about $3.5B annual investment tax credits (ITCs) enjoyed by approximately 20,000 Canadian businesses. About 70% of these ITCs are provided to small businesses in Canada.Depending on the size and type of business, SR&ED incentives are:
- a deduction against income
- an investment tax credit (ITC) that can be
- non-refundable
- refundable
The pool of deductible SR&ED expenditures can be used to reduce the net income for tax purposes in the current year or deduct them in a future year.
Your ITCs will be at least 15% and can be as much as 35% of your qualified SR&ED expenditures. You can use the ITCs to reduce your income tax payable for the year. If you have excess ITCs in the current year, you may also get a refund. If you have any unused ITCs, you can carry them back 3 years or forward 20 years and apply them against tax payable for other years.
Corporations, individuals, trusts and members of a partnership can use these Government of Canada incentives.
What can a business earn?
It depends on the type of business structure and the qualified SR&ED expenditures your business has.
For most Canadian-controlled private corporations (CCPC) can earn a refundable ITC at the enhanced rate of 35% on qualified SR&ED expenditures up to their expenditure limit for the tax year (maximum expenditure limit is $3 million). The business can earn a non-refundable ITC at the basic rate of 15% on an amount over your expenditure limit. However, if a CCPC also meets the definition of a qualifying corporation, 40% of the ITC earned at 15% can be refunded. For non-CCPC, the rate is capped at 15% and is non-refundable ITC.
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