The SR&ED tax credit program encompasses numerous factors that can influence the rate of return for a business. Some of these factors include the type of company, their revenues, and the taxable capital of associated groups of businesses. Generally speaking, there are two different types of companies that qualify for SR&ED tax credits. We summarize them below, but for a full CRA explanation, go here.
1. Canadian Controlled Private Corporation (“CCPC”)
A CCPC refers to a small- to medium-sized corporation that generates less than $500k of taxable net income. These private enterprises are controlled by Canadian residents and treat SR&ED tax credits a very specific way. Canadian Controlled Private Corporations also have the opportunity to receive an enhanced and refundable Investment Tax Credit.
It’s worth noting that “refundable” is the key element of the SR&ED tax credit. This is because you can expect to receive a cheque from the CRA as long as you don’t owe them any taxes. Keep the following refundable tax credit approximations in mind:
- 1. Eligible salaries: 64% refundable tax credit
- 2. Eligible contractors: 32% refundable tax credit
- 3. Eligible materials: 42% refundable tax credit
2. Non-CCPCs or Large CCPCs
Any foreign or publicly owned corporations that don’t qualify for the SR&ED tax credit as they are not small- or medium-sized CCPCs. In addition, this category includes CCPCs that exceed the SR&ED expenditure limits or the small business deduction. Be sure to note that these businesses are only eligible to receive a non-refundable SR&ED tax credit at a reduced rate. Keep the following non-refundable SR&ED tax credit approximations in mind:
- 1. Eligible salaries: 36% non-refundable tax credit
- 2. Eligible contractors: 18% non-refundable tax credit
- 3. Eligible materials: 24% non-refundable tax credit
These SR&ED tax credits can be used to reduce taxes payable in the previous three years. Otherwise, the tax credits can be carried forward indefinitely. In addition, be sure to remember that the actual rate is subject to changes depending on the province, the specifics of the corporation, and the mix of the eligible expenditures.
Now that you have a better understanding of the rules, it’s time to go through a real calculation. For instance, a manufacturing company that qualifies as a CCPC may want to form its own proprietary methods for developing low-tolerance metal jigs that create seamless connections. In order to determine whether we have SRED, we must first go through the necessary technical process.
3. SR&ED TAX CREDIT STEPS
Here are the 5 main steps involved in the technical process with respect to SR&ED tax credits:
1. The first step is to identify the actual qualifying expenditures for the staff, contractors, and materials.
2. Next, we apply the overhead method to the salaries noted in Step 1. It’s typically recommended to use the proxy method when applying the overhead, as this method is the more straightforward one.
3. Now, it’s time to calculate the provincial investment tax credits. For British Columbia, this will amount to 10% of the total qualifying expenditures.
4. Determine the total reduction of the expenditures pool for Investment Tax Credits.
5. Calculate the federal ITCs.
Each of these steps plays a critical role in the rate of return and refund amount. Keep these tips handy to simplify the CRA SR&ED rate of return process. If you’d like to check out a case study, SRED Case Study.