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Taking advantage of R&D tax credits

By Luc C. Duchesne There are two groups of entrepreneurs that confuse me: those who tell me they are proud that they never used government money whatsoever, and those complain that there isn’t enough government money to support new businesses.

By Luc C. Duchesne

There are two groups of entrepreneurs that confuse me: those who tell me they are proud that they never used government money whatsoever, and those complain that there isn’t enough government money to support new businesses.

My position is that entrepreneurship is about making money and that we should take advantage of the grants and incentives available to us!

So we should make use of government help, especially in times of recession, when money is tight and we have a collective duty to maintain the workforce and infrastructure in place until such time as they economy will recover. Right now many companies are dipping in their cash reserves to keep their employees occupied just so they can ramp up quickly when the good times come back. Well, I see Scientific Research and Experimental Development (SR&ED) the same way: it needs to be done to keep ahead of the competition, and might bring the good times back faster through technological innovation.

In Canada we have one of the best SR&ED program in the world. No kidding! And most of us don’t know about it.

All of us Canadians doing business have access to SR&ED tax credits which is administered by Canada Revenue Agency ( The thing though, these are after-the-fact grants that requires you to plan ahead and to be able to cash flow your research and development operations. In short, you do the research and if you file a claim and it qualifies, you get the credits. Planning is essential.

The SR&ED program is a federal tax incentive program designed to encourage Canadian businesses of all sizes and in all sectors to conduct R&D in Canada that can lead to new, improved, or technologically advanced products or processes.

The SR&ED program is the largest single source of federal government support for industrial research and development and can lead to actual monies going to companies, even when the company’s net earnings are zero.

Good companies claim SR&ED tax credits year after year. They keep records of their activities and at filing their corporate return, they include Form T661, with is the specific form required to file for SR&ED tax credits.

Depending on earnings, companies can get an actual cash refund for up to 45 per cent of the monies expanded on qualifying research and development expenses—there is a refund from the federal government and there is a refund from the Ontario government.

According to CRA’s documentation, work that qualifies for SR&ED tax credits includes: experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
applied research to advance scientific knowledge with a specific practical application in view; basic research to advance scientific knowledge without a specific practical application in view;
support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, but only if the work is commensurate with, and directly supports, the eligible experimental development, or applied or basic research.

Some activities don’t qualify: social science and humanities research; commercial production market research or sales promotion; quality control or routine testing of materials, devices, products, or processes; routine data collection; prospecting, exploring, or drilling for or producing minerals, petroleum, or natural gas; and development based solely on design or routine engineering practice.

According to Statistics Canada, the use of SR&ED tax credits is a measure of a community’s technological sophistication. The greater the use, the more competitive we become.

Why don’t companies take advantage of it? My experience is that people just don’t know about the program or that they are scared of audits. It’s a fact of life that audits of SR&ED claims are frequent.

Because of my own bias in scientific research, I applaud government initiatives that support the development of new products and ideas. I think these are forward looking approaches that will provide us with the long term economic diversity that we need so badly and could have kept us of our current troubles.

I also think every company should invest some of its earnings in research and development to keep ahead of the curve. The half life of knowledge is about two years—in two years, half the body of knowledge of a specific field becomes obsolescent. This means we have to keep up.

Dr. Luc C. Duchesne is the president of CEO of Forest BioProducts Inc. and SITTM Technologies Inc. and is based out of Sault Ste. Marie.