I love to talk to clients about their “next steps” and to hear how they intend to expand organically with their creative, entrepreneurial solutions! Recently, some clients talked about wanting to proceed, but also wanting to conserve cash with COVID-19, for protection. It is a quandary – they are torn between “if you stagnate, you die” and “cash is king; conserve it all costs.” Let’s talk about what might work to expand, without using all of their hard-earned cash.
Now more than ever Canadian companies must be in a position to be able to compete on a global scale, which is complicated due to factors such as increased competition coming from countries with lower labour cost markets and/or more favourable tax environments. Fortunately, there are opportunities for companies to access tax incentives that help to level the playing field and therefore encourage the innovative mindset that Canadians are famous for – think the Canadarm! (I know – I use that example a lot – so proud of it).
The Scientific Research and Experimental Development Tax Credit (SR&ED) program is the flagship program offered by the federal government that is aimed at incenting companies to undertake research that in many cases might be too risky or too costly to otherwise consider. Recognizing the importance of such a program, most of the provinces have followed suit with their own programs that for the most part rely upon the federal program’s eligibility rules.
For a small Ontario-based Canadian Controlled Private Corporation (CCPC), this can mean a cash refundable credit worth in excess of 64 per cent of its qualifying labour expenditures incurred in respect of its research activities. Other types of corporations earn credits approaching 28 per cent that can be applied against taxes payable.
In order to claim these credits, there is a defined process under which the claim is made within the corporate tax return of the company as it is administered under the Income Tax Act. In doing so, the claimant must clearly outline how the work undertaken resolves a technological uncertainty in a systematic fashion that results in a technological advancement. These claims are subject to review by the CRA.
Companies that are making payments to qualifying research organizations such as research institutes, hospitals, universities and some colleges may be able to take advantage of a different approach in respect of these costs. Payments of this nature are treated as Third Party Payments under the Income Tax Act where the payor is contributing to a research project but does not effectively control it. To qualify, the payment must be to an Approved Entity, for SR&ED to be performed and the payor must have a right to exploit the results of the research (but generally not through IP ownership).
Where the payment is made to an Approved Entity in Ontario, the company would also qualify for an additional 20 per cent credit that is known as the Ontario Business Research Institute Tax Credit. When combined with the other available credits this means a total credit of approximately 42 per cent for small CCPCs and 26 per cent for other companies. Basically, it means a lower credit than if the SR&ED is done yourself, but it might be on a larger amount, as the payments are presumed to be eligible as the entities receiving the funds are pre-approved and the claiming process is therefore simplified.
Ultimately, the rules surrounding the program can be complex and there are many nuances to the program, both from a financial as well as scientific perspective. With care the program can be leveraged effectively – will it level that playing field? Who knows – it might even give us the advantage!
Laurie Bissonette, FCPA, FCA, is a partner with KPMG Enterprise™. She can be reached at 705-669-2521 or firstname.lastname@example.org.