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Cash in on your Business Innovations

26/04/2011


Many businesses develop innovative ways to overcome everyday problems, but did you know that some of your solutions could qualify as research and development (R&D) and be eligible for up to 41.5% in federal and provincial tax refunds?

The Scientific Research and Experimental Development (SR&ED) Tax Credit Program provides cash incentives to Canadian businesses of all sizes and in all sectors to conduct R&D that leads to new or improved products or processes. For many people, R&D conjures up images of scientists in lab coats – but the SR&ED program applies to a great deal more.

What qualifies as R&D?

Put simply, the goal of the SR&ED program is to encourage businesses to "build a better mouse-trap." This could mean developing a new process; improving an existing process to make it faster, more efficient, precise, economical or environmentally friendly; or creating or enhancing a product by resolving a technical challenge common to your industry.

To give you some practical examples, here are a few businesses MNP has recently assisted with SR&ED claims:

  • An equipment manufacturer developing new data collection equipment and software for the forest industry.
  • A custom parts manufacturer who automated part of his production process so it could run unattended at night.
  • A software company building a new game engine for internet-based video games.
  • A food processor developing new product formulation, ingredient and manufacturing process specifications.
How much is it worth?

While tax credit rates differ based on the size of your business, the potential savings can be significant. In British Columbia claimants can receive up to 67.5% of qualifying wages – in cash. For small businesses with less than $500,000 in net income, the general rate for other eligible expenditures is 41.5%. Eligible expenditures can include salaried labour, materials, equipment, contractors and overhead.

Again, it helps to consider some tangible examples:

  • A small nutri-ceutical company with 15 employees received $397,000 in cash for changes to their core products and processes over a two-year period.
  • A software implementation specialist (8 staff) received $138,000 in cash for work on its proprietary API (application program interface), allowing it to better integrate high end accounting and ERP systems.
How do you make a claim?

The SR&ED program is delivered through the Income Tax Act and administered by the Canada Revenue Agency (CRA). To successfully navigate the process, you will likely need an accountant to help you file a claim. However, the first step is to determine whether or not your business innovation is eligible.

There are numerous SR&ED consultants who understand the technical eligibility and will help your accountant to file the claim. Many SR&ED consultants work on a contingency fee, so there's no direct cost (other than your time) to discuss your eligibility and what's involved with making a claim. You can also contact the CRA directly for advice.

If you choose to go with a consultant, look for a SR&ED specialist who is part of a team that includes both financial and technological expertise and has experience working with the CRA. You should also look for someone who has tax experience or works with tax experts to ensure you get the most from the claims process.

Final thoughts

The potential savings through SR&ED tax credits can have a very have a measurable impact on your bottom line. If you think you might be eligible, it's well worth investigating.

Rob Farrow, CGA is a Senior SR&ED Financial Specialist and Alex Whitehouse, MBA, is a SR&ED Technical Specialist with MNP. They travel Vancouver Island on a regular basis to help businesses identify SR&ED opportunities and maximize the value of their claims. For more information, contact Rob or Alex at 1.877.688.8408 or go to www.mnptax.ca/services/scientific-research-experimental-development-services.