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Understanding R&D Incentives in Canada

The Canadian government offers Research and Development Tax credits to incentivize private companies to increasingly undertake R&D. These R&D tax credits are awarded via the SR&ED program and this Canadian program offers some of the biggest tax credits in the world.

Canadian R&D Tax Credits

It is generally acknowledged in economical circles that an increase in spending on research and development (R&D) leads to growth in productivity. Growth in productivity is in turn a key driver of overall economic growth, and this will result in increased exports and increased employment. This can in turn result in a reduced reliance on low added-value industry verticals and resource extraction.

Private companies often don’t spend much on R&D as they are too focused on maximizing short-term economic opportunities and short-term profit. This means that incentives by governments for private R&D that are well applied and well-designed can have a multiplier effect on economic growth. Another advantage of government incentives for private R&D is that it is a direct substitute for R&D funded by the government.

Economists agree that there are many advantages to leaving the decision making for R&D spending in the capable hands of private enterprises. This avoids the often encountered problem of a government attempting to select winners by funding R&D companies and work directly for particular projects.

SR&ED

In Canada, research and development credits are awarded via the SR&ED (Scientific Research and Experimental Development) program. This is a $3 billion per year program, allocated to more than 20 000 companies to incentivize the creation of jobs in Canada.

The SR&ED program has been created to incentivize Canadian businesses in any sector and of any size to conduct R&D. Although basic research is included in SR&ED, most claims resort under SR&ED’s experimental development part. According to federal government statistics, 95% of credits are not awarded for traditional research and development work, but for experimental development work.

The process of developing new services or products, failed projects, carrying out IT projects, bringing new technologies into a business, and prototyping are all experimental expenditures that could possibly qualify for SR&ED.

A common misconception is that SR&ED is only for huge multinational companies. This is not the case. The ideal company for SR&ED is rather small businesses (known as a Canadian Controlled Private Corporation or CCPC) as the credit rates for these firms are higher when compared with multinational or public companies. Credits are also given as direct payment for small businesses rather than non-refundable tax deductions for bigger companies.

How Big A Difference Can SR&ED Make For A Canadian Company?

The answer to that question is a massive difference. Small Canadian businesses can receive credits of as much as 70% of their salary spend, and 40% of spend on subcontractors and materials. This may at first seem difficult to believe, and when hearing this, many people ask why Canada’s government does not talk about this constantly? The simple reason is that the government’s main focus is not to give money away. It is however in the business of creating Canadian jobs, and that is why the program was created.

Once a company realises what power the SR&ED Program has, it often changes the way it thinks about growing the business. If you understand that the government will pay 50% of a project’s cost, you are more likely to move ahead with that work. If you understand that the government will pay as much as 70% of new engineering staff costs, you may be much more inclined to hire staff and embark on new technical jobs that are risky. You might even go so far as to hire a new computer expert rather than outsourcing two more critical IT jobs to overseas countries.

SR&ED consultants can work with you to explain how the program can accelerate your business’ growth and goals.


 Written by: 

Peter Bailey 

Partner, Flow Ventures 

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  • What projects qualify and which R&D expenditures are eligible
  • An estimate of the total return you can expect
  • How to maximize the size of a claim & and to optimize for the success of that claim
  • Potential eligibility for additional Government funding programs
  • If you are already claiming, we will analyze your past claims to determine if anything was missed