TAXATION - RESEARCH & DEVELOPMENT

Canada has one of the most generous tax incentive programs in the world to encourage Canadian corporations and individuals to undertake Scientific Research and Experimental Development ("R & D") activities.

Cash rebates are available to taxpayers that are performing qualifying R & D activities in Canada.

These cash rebates are available to a large range of businesses, not just "high tech" industries. Many businesses undertake qualifying R & D activities without realizing it, causing them to miss out on significant cash rebates!

R & D Tax Incentives

The Canadian R & D program offers two major government incentives: tax deductions and cash rebates in the form of investment tax credits.

Tax Deductions
A full tax deduction is available for qualified current and certain capital R & D expenditures incurred in Canada. Although current expenditures would generally be deductible anyway, the ability to deduct capital expenditures provides a significant benefit because capital items (e.g. equipment) must otherwise be depreciated for tax purposes over several years.

You may deduct all or any portion of qualified R & D expenditures incurred in a year. Any unclaimed amounts may be carried forward indefinitely and deducted in a subsequent year.

Investment Tax Credits
Investment Tax Credits may be claimed on R & D expenditures incurred in Canada. The majority of the Federal Government's support for Canadian R & D is provided through the tax credit program.

The tax credit rates vary from 20% to 35% of the R & D expenditure depending on the person or corporation carrying on the R & D and the location within Canada.

Each dollar of tax credit directly reduces one dollar of Federal taxes payable.
In addition, certain Canadian controlled private corporations are eligible for a cash rebate even if there are no Federal taxes payable. The amount of tax credit claimed must be added to taxable income in the following year.

These cash rebates can be a major benefit for a start-up operation or new product development. Typically in these circumstances the business may not generate sufficient taxable income to fully utilize the tax credit. However, the cash rebate mechanism provides the much needed cash flow to help finance the business during the period.

For example, for a qualifying Canadian controlled private corporation, an R & D project costing $100,000 in current expenditures will generate a federal cash rebate of $35,000 even if there are no taxes payable. In addition to federal credits, provincial credits are also available. For example, a refundable B.C. tax credit of 10% applies to R & D expenditures carried out in B.C.

What Is R & D?

The definition of R & D has evolved over the years to include a wide range of activities, many of which are performed in the normal course of business. There is a common misconception that R & D tax benefits are only available for people in white lab coats!

Some of the activities to consider include:

• New product development
• New or modified production processes / techniques
• Computer software development

How Nordahl, Craig, Cummings & Gares Can Help

Nordahl, Craig, Cummings & Gares has extensive experience in obtaining R & D cash rebates for a wide variety of businesses.
We become involved in all aspects of the R & D claim from the identification stage to negotiations with Canada Revenue Agency (“CRA”).

Our services include:

• identification of qualifying R & D activities,
• determining what costs are eligible to include in the R & D claim,
• assistance in completing the necessary filing requirements including project description reports,
• dealing with CRA auditors (all R & D claims are audited prior to issuing a cash rebate),
• assistance in ongoing R & D documentation and record keeping.

There may be an opportunity to file an R & D claim for a previous year.
The filing deadline for corporations is 18 months after the corporation's year end.

If you wish to have your business reviewed for the possibility of an R & D claim, contact our R & D specialist, Ron W. Batty, C.A.

Note: The preceding information is for educational purposes only. Readers should consult their professional advisors prior to acting on the material contained herein.