A tax credit that’s of­ten over­looked

A wide va­ri­ety of ac­tiv­i­ties, sec­tors may qual­ify

National Post (Latest Edition) - - FINANCIAL POST - BOB WATER­WORTH

Are you over­look­ing a po­ten­tial source of cash for your small busi­ness?

If you haven’t con­sid­ered whether any of your busi­ness’ ac­tiv­i­ties qual­ify for re­search and devel­op­ment tax cred­its, you may be missing out. You may think of re­search and devel­op­ment as some­thing big com­pa­nies with lab­o­ra­to­ries full of white-coated sci­en­tists do, but if you’re in­vest­ing in technology or de­vel­op­ing new or im­proved prod­ucts or pro­cesses for your busi­ness, you may be el­i­gi­ble to claim re­fund­able R&D tax cred­its.

Canada’s R&D tax in­cen­tives are among the most gen­er­ous in the world and they’re es­pe­cially favourable for small busi­nesses. Each year, the R&D pro­gram pro­vides more than $4-bil­lion in tax cred­its to more than 18,000 claimants, 75% of which are small busi­nesses.

Un­der the fed­eral R&D rules, “Cana­dian-con­trolled pri­vate cor­po­ra­tions,” which must be res­i­dent in Canada and not con­trolled by any com­bi­na­tion of non-res­i­dents or pub­lic cor­po­ra­tions, can be el­i­gi­ble for a re­fund­able tax credit (payable even if the com­pany has no tax to pay) of 35% of their qual­i­fy­ing R&D costs. Other cor­po­ra­tions can earn a non-re­fund­able credit of 20% of qual­i­fy­ing costs.

These qual­i­fy­ing costs in­clude salaries and wages, ma­te­ri­als, pur­chased or leased ma­chin­ery and other equip­ment, over­head costs and cer­tain con­tract pay­ments for R&D work.

Any ac­tiv­ity your busi­ness car­ries out that is in­te­gral to the devel­op­ment of a new prod­uct or process may qual­ify, even if the prod­uct or process does not end up be­ing com­mer­cially vi­able.

A wide va­ri­ety of ac­tiv­i­ties in dif­fer­ent types of busi­nesses may qual­ify. For ex­am­ple, I’ve seen el­i­gi­ble R&D in in­dus­tries rang­ing from food and con­sumer prod­ucts to high-tech in­for­ma­tion, com­mu­ni­ca­tion and video games, to auto parts and en­gi­neer­ing.

The list is lengthy but the com­mon theme is that where there is in­no­va­tion, R&D tax cred­its are likely wait­ing to be claimed.

For ex­am­ple, a small startup com­pany I know of has about 15 em­ploy­ees and was de­vel­op­ing a new con­struc­tion sup­ply prod­uct to break into a ma­ture mar­ket. They knew that to be suc­cess­ful they would have to of­fer a cheaper prod­uct than the com­pe­ti­tion that would also meet and out­per­form all cri­te­ria of the ex­ist­ing mar­ket­place op­tions.

Their ef­forts to de­velop this low-cost, high-per­for­mance prod­uct with spe­cial fea­tures in­volved three projects in which they spent about $1.2mil­lion (in­clud­ing labour,

Where there is in­no­va­tion, R&D tax cred­its are likely wait­ing

ma­te­ri­als, contractor­s, leases and cap­i­tal equip­ment) that wound up be­ing el­i­gi­ble for R&D cred­its, re­sult­ing in a re­fund of al­most $500,000.

This re­fund al­lowed the com­pany to in­vest in fur­ther re­search to de­velop a new ma­te­rial in part­ner­ship with a lo­cal uni­ver­sity, shar­ing equip­ment and staff for both par­ties’ ben­e­fit.

Tak­ing the time to file an R&D tax credit claim helped take a small startup busi­ness and its re­search to the next level, ben­e­fit­ing both the com­pany and a uni­ver­sity.

Of course, Canada Rev­enue Agency of­ten re­views R&D claims, and this com­pany was no ex­cep­tion. The com­pany’s doc­u­ments and pro­to­types, along with their com­mit- ment to their de­vel­op­men­tal ef­forts and chal­lenges they over­came, sat­is­fied the CRA and the claim was ac­cepted as filed.

If your com­pany is con­sid­er­ing an R&D claim, it’s help­ful to keep track of the time your em­ploy­ees spend work­ing on R&D projects and make sure the work is well doc­u­mented to sup­port your claim.

Along with the fed­eral credit, your busi­ness may also be able to take ad­van­tage of pro­vin­cial R&D tax cred­its of­fered in Bri­tish Columbia, Al­berta, Saskatchew­an, Man­i­toba, On­tario, Que­bec, New Brunswick, Nova Sco­tia and New­found­land. When pro­vin­cial cred­its are in­cluded, the af­ter-tax cost of $1,000 spent by a small busi­ness on R&D can gen­er­ally range be­tween $180 in Que­bec, $272 in On­tario and $315 in Bri­tish Columbia.

To make a claim, you will have to file an in­come tax re­turn and some spe­cific forms avail­able from the CRA. The dead­line is 18 months from the end of the tax year in which your busi­ness in­curred the ex­penses.

Of course, you don’t have to wait un­til the dead­line to file your claim. The CRA aims to process re­fund­able claims within 120 to 240 days af­ter re­ceiv­ing them but some­times does so even sooner. For ex­am­ple, I have seen some com­pa­nies re­ceive their re­funds rang­ing from $100,000 to $500,000 in as lit­tle as one to five weeks af­ter fil­ing their claims.

Al­though it takes do­ing some ad­di­tional pa­per­work, it can def­i­nitely be worth­while for your small busi­ness to claim any R&D tax cred­its it is el­i­gi­ble for be­cause claim­ing these cred­its can re­duce the com­pany’s tax bur­den and give its cash flow a sig­nif­i­cant boost — two things that are al­ways wel­come in any busi­ness, large or small.

Bob Water­worth is an as­so­ci­ate part­ner in KPMG En­ter­prise’s R&D Tax Prac­tice in Toronto.

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