The Scientific Research and Experimental Development (SR&ED) is Canada’s leading tax credit for businesses that perform research and development. Research and development projects are incentivized by the Canadian federal government via the SR&ED program with annual tax incentives totaling more than $3.5 billion for over 20,000 claimants.
Although the Scientific Research and Experimental Development (SR&ED) tax credit provides significant opportunities for many Canadian organizations, one question that often arises is, “How will SR&ED impact my business’s taxes?” This article will provide a high-level view at what your organization may expect. First, if you want to learn more about the basics of this program, read our article, What is SR&ED? Research and Development Funding for a general overview.
How Is the Scientific Research and Experimental Development (SR&ED) Tax Credit Taxed?
As many business owners know, tax plays a significant role in how businesses conduct their finances. However, to many it is unclear how government funding, such as the Scientific Research and Experimental Development (SR&ED) tax credit impacts your tax.
Like all government assistance programs, grants and investment tax credits must be included in income. What is not always a clear-cut is how a Company can realize the benefit of the tax credit. Is it cash, a reduction of taxes payable or both? The answer depends on variables such as the type of legal entity, the size of the Company and the province the SR&ED activity takes place in. Further, whether or not the business is achieving taxable income or whether or not they are stacking SR&ED with grants such as the Industrial Research Assistance Program (IRAP) all contribute to differences as to how the benefit is realized.
Business income is income you earn from a profession, a trade, a manufacture or undertaking of any kind, an adventure or concern in the nature of trade, or any other activity you carry on for profit and there is evidence to support that intention.
However, this entirely depends on the tax position of the legal entity that the SR&ED is occurring in. For example, if you are a startup company and do not have a taxable income, then you are not paying tax and the SR&ED input tax credits (ITCs) may be fully refundable as cash if they meet the criteria to be a Qualifying Canadian Controlled Private Corporation (“CCPC”). While the ITC’s are brought into income, if the corporation itself does not achieve taxable income there would be no immediate tax payable but rather a reduction of losses to carry-forward.
In contrast, let’s assume that you are a large corporation or a public corporation that is located in Canada and is quite profitable and, therefore, paying corporate income tax. In this situation, since your organization is responsible for paying corporate taxes and is SR&ED eligible, the ICTs may be used to reduce the tax that you may be paying on the corporate side. Therefore, you may see an immediate benefit of reducing taxes payable.
Moreover, these credits can be carried forward if your business does not have the corporate taxes payable to utilize the benefit and you are not eligible for the refundable status that smaller CCPC’s enjoy. Company’s that paid tax in the prior three years can also carry these credits back three prior periods to utilize the credits should they be unable to use them in the current fiscal year.
Does it Matter Which Province My Business is Based in?
It is also important to note that the province or territory your organization is in will also have an impact. Although the SR&ED initiative is a federal program, there are also many provincial variants that are available to businesses, such as Alberta’s Innovation Employment Grant (IEG) or one of Ontario’s three SR&ED variants such as the Ontario Innovation Tax Credit (OITC).
To learn more about SR&ED and the provincial variants available to Canadian businesses, visit our comprehensive Scientific Research and Experimental Development (SR&ED) program page.
In summary, when considering how SR&ED will impact your organizations’ tax standing the results will often depend on the circumstances of the company itself, namely:
- What is your company’s tax status?
- How large is your organization?
- What Province is your business located in?
Learn About Tax Credits and Government Funding with Mentor Works
The world of tax credits and government funding programs is complex and ever-changing. That’s why Mentor Works, a Ryan company is here. Our team of tax experts and government funding specialists help Canadian businesses leverage funding opportunities to perform research and development, hire and train staff, and grow their operations. Get in touch with our team today to learn what opportunities are available to your business.
Also, make sure to sign up for one of our industry-leading events to learn the best ways to approach the funding landscape from industry-experts.