The rate of return can vary depending on a lot of the business criteria such as their revenues, the type of corporation, and taxable capital of the associated group of companies. But generally as a baseline for discussion purposes, there are two types of corporations that qualify for SR&ED.
These generally mean your small-medium sized enterprises that generate less than $500k of taxable net income and are controlled by Canadian residents. These corporations receive an enhanced and refundable Investment Tax Credit. Refundable is the big part because they will actually send you a cheque provided you don’t owe them any taxes, which is great.
Eligible salaries are approximately 64% refundable tax credit.
Eligible contractors are approximately 32% refundable tax credit.
Eligible materials are approximately 42% refundable tax credit.
These are all other corporations that are foreign or publicly owned as well as CCPC that exceed the SR&ED expenditure limits or the small business deduction. These corporations can only receive a non-refundable ITC and at a reduced rate.
Eligible salaries are approximately 36% non-refundable tax credit.
Eligible contractors are approximately 18% non-refundable tax credit.
Eligible materials are approximately 24% non-refundable tax credit.
Now these tax credits can be used to reduce taxes payable in the previous three years or carried forward forever. There is finally a way to never pay tax again. Also important to note that the actual rate will change depending on province, specifics of the corporation, and the mix of the eligible expenditures.
Now these are a rule of thumb so let’s walk through an actual calculation. Imagine that we are a manufacturing company located in British Columbia that qualifies as a CCPC. The company is developing its own proprietary techniques for machining low tolerance metal jigs that interlock together to form seamless connections. We got through the technical process to determine that we indeed have SR&ED.
Step 1: We need to determine the actual qualifying expenditures for the staff, contractors and material.
For the sake of simplicity, we are going to go with the hardest example, salaries and wages, seems counterintuitive but the same principles apply to the other two categories as well.
Let’s say that we have 4 eligible engineers being paid $75,000 each while spending half their time on SR&ED.
$75,000 * 4 * 50% = $150,000
Step 2: Apply the overhead method to the salaries.
We are going to go with the proxy method so it is a straight gross up of 55%.
$150,000 * 55% = $82,500. $82,500 overhead gross up + $150,000 eligible salaries = $232,500 in total qualifying expenditures.
Step 3: Calculate the provincial investment tax credits.
Since we are in British Columbia, it will be 10% of the total qualifying expenditures.
$232,500 * 10% = $23,250.
Step 4: Calculate the reduction of expenditures pool for the BC ITCs.
This reduction is because you can’t double dip, any amount received for the BC ITCs reduces the amount that can be claimed for federal ITCs.
$232,500 – $23,250 = $209,250 remaining in the expenditure pool.
Step 5: Calculate the federal investment tax credits.
$209,250 * 35% = $73,237.50.
So we have our provincial ITCs of $23,250 plus the federal ITCs of $73,237.50 for a total refundable tax credit amount of $96,487.50. So of the eligible SR&ED expenditures of $150,000, there is a rate of return of ~64%.
Now there are a lot of complications of factors that will complicate the above. For example: What happens when someone gets claimed over 90%? We claim someone who owns more than 10%? Their income exceeds the SBD? All these different factors and others will affect the rate of return and the amount of the refund.
