Basics for
Engineers
by
Mike Volker
|
|
Business
Basics for Engineers by Mike Volker |
Here is some great news for technology companies. Canada, and in particular British Columbia, may be the best region in the world in which to set up a technology venture because of the very generous research and development tax credits.
The Canadian government gives away well over $1.5 billion each year to companies (and other taxpayers, too) who do research and development work - which, by definition, means technology companies. This is called the Scientific Research and Experimental Development Program or SRED for short. For current, up-to-date information on this very useful program, please visit the Canada Customs and Revenue Agency's (CCRA) web site at http://www.rc.gc.ca/sred/.
And, it's a refundable credit. This means that if you have no revenue and/or are not profitable yet, you can get the credit back in cash! That's right. The Feds send you a cheque! In British Columbia, that can amount to as much as 68 cents back on every incremental R&D dollar spent! Many people are under the false belief that the credit is much smaller and may not be worth the effort. Please read on.
Generally, Canadian-controlled private corporations (CCPCs) with less than $200,000 in taxable income can receive a refundable investment tax credit (ITC) of 35% (68% after the gross up - see below for the math) of qualifying SR&ED expenditures, to a maximum of $2 million of expenditures. Most other Canadian corporations, proprietorships, partnerships, and trusts can receive an investment tax credit of 20% of qualifying SR&ED expenditures. Note: Individuals, i.e. proprietorships, can even claim this - great for hobbyists who are doing weird science in their basements!
So, for every $1.00 you spend on research and development including an overhead allowance, you get up to $.35 back in either CASH or a tax credit from the federal government. That's like having a 35% silent partner in your business - only better. Public companies and non-CCPCs, such as foreign controlled corporations, do not get quite this much. They are limited to a 20% grant. But, that's still pretty darn good!Still More...
Certain provinces, such as British Columbia (as of Sept'99), also provide a provincial SRED credit. In the case of B.C., for example, the Province provides an additional 10% credit. So for every incremental R&D dollar spent, a total of $.68 can be recovered, taking into account the provincial and federal credits on the overhead topped-up direct R&D cost. Here's how the calculation works:
SRED Claims, including B.C. Credit:
The following applies to a CCPC (Canadian Controlled Private Company)
Company pays $100 for Research (e.g. Salary)
Company Payment= $100
65% Overhead Proxy= $65
TOTAL R&D= $165
Claim:
BC Portion: 10% of $165 = $16.5
Fed Portion: 35% of ($165-$16.5) = $51.98
TOTAL Refundable Tax Credit= $68.48 (i.e. equal to 68.48%
of dollars spent)
For a public company or non-CCPC, the federal credit drops to 20% and the numbers look like:
Company Payment= $100
65% Overhead Proxy= $65
TOTAL R&D: $165 (same as for a CCPC)
Claim:
BC Portion: 10% of $165= $16.5
Fed Portion: 20% of ($165-$16.5)= $29.7
TOTAL non-refundable Tax Credit= $46.2 (i.e. equal to 46.2%
of dollars spent)
Actually, there's a Catch-22 here. To raise the initial capital, companies try to convince investors that there is little risk - i.e. give us the money and will do the R&D and be successful. But then, to get the SRED funding, companies have to convince government that there really was a risk or element of uncertainty! It's a balancing act!
There are many consultants who help companies maximize their claims as well as help them in setting up their business so that the claiming process can be simplified. Some do this on a fee for service basis (many accounting firms have experts in this area) while others do it on a contingency basis. Often, their fees are less than the extra money they can find for companies. A good example of one such advisor that specializes in SRED grants is Technology Incentives Inc (see www.techincentives.ca). Alas, many eligible firms are unaware of the SRED program and should seek some advice in this regard.
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