SR&ED and Accelerated capital cost allowance (CCA) rate and Manufacturing or Processing (M&P) Tax Credit
The federal Government administers the Scientific Research and Experimental Development (SR&ED) tax incentive program which is designed to encourage economic development and job creation in Canada. The program is highly regarded by business and is the largest source of federal funding for industrial R&D in Canada. The tax incentive program is run on a demand basis, and is not capped by the Government to claimants for any particular year.
The legislation is the responsibility of the Department of Finance, while the Canada Revenue Agency (CRA) is responsible for the programs administration. The CRA has been looking to improve and simplify the claim process, increasing the scientific capacity of the program and improving consistency with respect to processing SR&ED claims.
Description of Incentives
Eligible activities and expenditures are available to claim a 20% federal tax credit, however this rate has decreased to 15% for taxation years ending after 2013, and will be prorated for taxation years straddling 1 January 2014. Small Canadian-controlled private corporations (CCPCs) are eligible for a credit rate of 35% on the first CAD$3 million of expenditures per year.
Generally, a CCPCs must be private corporations, resident in Canada, and not tied or affiliated to non-resident persons or public corporations. The 35% credit may be refunded 100% for non-capital related expenses and 40% refunded for capital expenditures. The CAD$3 million limit is reduced where the preceding year’s taxable income for the corporation and associated corporations exceeds a threshold linked to the maximum small-business deduction business limit for the year and where the taxable capital of the corporate, for the preceding year exceeds CAD$10 million.
Where credits are unused, they may be carried forward 20 years and carried back a maximum of 3 years.
Where provincial jurisdictions are in place, tax credits range from 4.5% to 37.5% dependent on the relevant jurisdiction. A majority of provincial jurisdictions offer refundable or partially refundable credits.
The SR&ED tax credit is available to retroactive and current investments if they are claimed within 18 months of the fiscal year-end. Claimants must meet general guidelines to benefit from the incentive such as generally carry on business in Canada in the year; perform eligible SR&ED work related to the business; complete and file Form T661 expenditures claim with Form T2SCH31 (Schedule 31), Investment Tax Credit Corporations or Form T2038 (IND), Investment Tax Credit (Individuals) as required. Reporting is due 12 months after the filing due date of the return for the fiscal period where expenditures were incurred.
Accelerated capital cost allowance (CCA) rate and Manufacturing or Processing (M&P) Tax Credit
In 2013 it noted the last year where certain R&D qualifying assets were eligible for immediate deduction and SR&ED tax credits under the program. However despite this change, depending on the extent to which certain R&D assets are used in connection with a taxpayer’s eligible manufacturing and processing activities, these assets may be qualified for Class 29 property classification. Such assets may be depreciated over a three-year period as well as potentially qualifying for federal/provincial manufacturing or processing investment tax credits that range from 5 to 10% of qualifying expenditures.
Particular R&D assets such as Class 50 computer hardware may be eligible for other accelerated depreciation property classes at rates as high as a 55% capital cost/depreciation rate. The opportunity to claim capital assets used in SR&ED activities to qualify for CCA rate applies to project in current, prior and future years.
SR&ED is defined as a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis that involves basic research, applied research or experimental development and includes work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research where the work is commensurate with the needs and directly in support of the basic research, applied research or experimental development.
Qualifying work includes:
- Experimental development to achieve technological advancement for new products, process, devices, materials; or to improve existing ones;
- Applied research to advance scientific knowledge with a specific practical application in view;
- Basic research to advance scientific knowledge without a special practical application in view.
To successfully claim the created, an extremely detailed prescribed Form T661 and T2 Schedule 31 must be completed. The deadline for claiming and filing for research credits is 18 months after the end of the company’s tax year. There are no extensions available to this filing deadline. Provincial credit forms are also required for each jurisdiction of the claim.
Documentation for substantiation of the claim must be kept in the even of an audit by tax authorities. If an audit is undertaken, tax authorities may conduct a review of the technical eligibility and the expenditures claimed.
Swanson Reed offers the following services:
- Advice on tax preparation relevant to claiming the R&D tax credits incentive
- Preparation of documents relating to filing and substantiating a R&D taxation claim
- R&D tax advice and consultations
- R&D tax claim planning and preparation
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