With a focus on research and innovation, the Canadian government offers many grants and benefits for SMEs in the country. In this article, we’ll explore the SR&ED credit program: what is it and how can businesses benefit from it?
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Canada stands proudly as a global hub for technology and innovation. The nation overall consistently appears in the top five countries to found startups, and Toronto, Vancouver, and Montreal all feature in the top 40 cities globally. What’s more, Canada’s startups are attracting record levels of investment from venture capital funds.
To help small and medium business owners get started, and to make it attractive for businesses to base their research and development (R&D) in Canada, the government provides several tax incentives, including its Scientific Research and Experimental Development (SR&ED) Tax Incentive Program. Under this program, businesses can claim deductions, credits, and refunds against their research-related expenditure.
In this article, we explore what SR&ED credits are, what work is eligible, and what else small to medium enterprises (SMEs) may want to consider when carrying out R&D. We also investigate how tools such as financial reporting, human resources, and project management software fit into the equation.
What are SR&ED credits?
The SR&ED Tax Incentive Program is the largest federal program supporting research and development in Canada, providing $3 billion a year to more than 16,000 organizations.
Essentially, the program allows organizations (including large and small businesses, trusts, and individuals) to pool their R&D expenditure and deduct it against their income. Companies can also claim an investment tax credit (known as an ITC), which reduces the amount of income tax payable.
These incentives provide a tax reduction or credit of between 15% and 35% for R&D expenditures, and can be applied to both past and future tax years, if unused.
There are, of course, conditions to the program. Different types of businesses can claim reductions at different rates, and there are some restrictions as to what R&D work is eligible for SR&ED tax credits.
The government is keen that as many businesses as possible are aware of this program and make applications. As such, it has an outreach program, with online and in-person events to show businesses how to claim research and development funding.
How do I claim SR&ED credits?
First, any R&D expenditures that are to be deducted must meet qualifying criteria. The guidelines stipulate not only what work falls under the terms of the program, but why and how it is carried out. For example, research must address “scientific or technical uncertainty” and seek to generate or discover new knowledge that did not exist either within your organization or the general public domain. Furthermore, work must be experimental or analytical, involving a hypothesis and working to test that hypothesis.
Businesses can claim for a range of R&D expenses, including employee wages, materials, contracts, overheads, and payments to third parties. In order to make claims against these costs, businesses must ensure that they are tracking them. This is where financial reporting software comes in. These tools help SMEs to collect, translate and consolidate data from various systems and geographic locations. They also allow companies to import and export financial data from other systems (such as HR software) and provide analytics so managers can maintain an overview of budgets. These features make it easier to submit accurate information when applying for tax credits or deductions under the SR&ED program.
Canadian innovation in action
When people think of innovation, many think of Silicon Valley and its network of private companies, universities, and research institutions. In Canada, the government is building similar hotspots for growth with its Superclusters initiative backed by billions of dollars in funding. The goal of the clusters is to generate 50,000 new jobs and $50 billion in added GDP, as well as providing much needed digital skills training and creating new opportunities for under-represented groups.
What other tech grants are available in Canada?
While the SR&ED Tax Incentive Program is the largest program available to Canadian innovators, it is not the only one. SMEs may find these innovation initiatives better suited to their needs:
- The Boost your Business Technology Grant provides Canadian-owned small to medium enterprises with up to $15,000 towards a digital advisor, who can help them make decisions about new technology to improve their competitiveness. SMEs can also apply for a 0% interest loan towards the cost of new digital tools.
- The National Research Council of Canada Industrial Research Assistance Program (NRC IRAP) offers consulting and funding to help SMEs innovate. It can also link SMEs with new graduates in their field and provide help to companies that want to expand into international markets.
- Through the Innovative Solutions Canada program, the Canadian government is looking to partner with SMEs that can help it solve issues of critical national importance. Projects cover areas including oceans, defence, the arctic, quantum computing and more.
- To ensure equity of digital opportunities for businesses across Canada, there are several programs to improve high-speed broadband access, especially for remote and rural communities.
- There is also an online Business Benefits Finder, where SMEs can provide information about their organization and the type of help they’re looking for, and discover local and federal programs that meet their needs.
Getting your R&D to the next level
Funding and incentives, including the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program, are a great way for Canadian SMEs to deliver groundbreaking innovation and expand their business. Having the right management software in place —as well as a clear R&D plan— helps businesses understand where they might require help and makes it easier to develop a robust case when applying for assistance.
All the pieces are in place for SMEs to succeed in Canada —it’s now up to you to make it happen.