How To Use SR & ED To Fund Your Business
by Arnab Dey Business Development 01 November 2022
Do you own a company that undertakes scientific research in your pursuit of innovation? Fund your business means you are just one step away from your business destinations, then you will require an SR and ED strategy to gather the fund for your business.
Similarly, does your business use experimental development to expand your capabilities while improving products and methods? If so, the SR&ED program is perfect for many entrepreneurs.
SRED stands for Scientific Research & Experimental Development. This governmental program began in 1985 and was implemented to incentivize companies conducting R&D.
What Are SR And ED Models?
SR&ED focuses more on innovation through testing and experimentation to overcome current limitations and develop new processes to expand a company’s operations and designs. Fund your business means there are certain kinds of models that you can use and make things work.
The program offers a tax credit for eligible expenses with this type of R&D and supports methods, services, products, and processes so a business can fund further innovation. The program is large, with over $3 billion provided to over 20,000 claimants, covering around 60,000 different R&D projects.
The Canadian government and its provincial partners want to encourage this research and development by offering funding as a tax incentive for certain expenditures within their business operations. If you are new to the SR&ED program, here is a beginner’s guide to understanding and utilizing it for your company’s growth.
How Does It Work?
The SR&ED tax credit program is open to all businesses that undertake qualifying activities.
These are the categories:
Experimental Development: This is work done that gains technological advancement by improving and creating new materials, products, or processes
Basic Research: When there is no specific, practical application in mind, you are working to advance scientific knowledge. You want to find a person who likes to fund your business. But finding, without research, is a typical challenge.
Applied: Research is being done to advance technical knowledge toward a specific and practical application.
Supportive Work: is done to support the process of basic and applied research.
This can be in the form of the following:
- Design
- Testing
- Engineering
- Mathematical analysis
- Computer programming
- Data collection
- Phycological research
- Operational research
What Expenses Can You Claim?
A company may only claim for eligible expenses, including wages and salaries for those working in the program. You can also claim materials and overhead costs.
Buildings, equipment, and machinery are capital expenses that cannot claim but can deduct from the fund your business, income as depreciation, or capital cost.
There is also work performed alongside the R&D that is non-eligible such as:
- Quality control
- Market research
- Routine data collection
- Commercial use of innovation
- Research in humanities or social sciences
Who Can Claim The Tax Incentive?
Most companies pursue new methods and processes through R&D at different times and become eligible for the tax incentive.
Eligible companies must be:
- Canadian-controlled private companies (CCPCs)
- Proprietorships, partnerships, and trusts
- Other corporations (applied to taxes payable but non-refundable)
Prerequisites for the SR&ED are:
- 90% of the SR&ED claimed work must be performed in Canada.
- Therefore all claims must be for SR&ED work or projects.
- Expenses like salary, material, or for a subcontractor need to be related to the claimed work.
- Salary and subcontractor expenses must only be paid to a Canadian entity with a SIN or BN.
Ultimately, to qualify for the incentives, you must show the following:
Technological Advancement:
The project’s goals are to further technological knowledge.
Technological Uncertainty:
The project needs to have faced technological uncertainties and worked to overcome them, then fund your business.
Technological Content:
The project has worked through a process to resolve technological uncertainty.
Projects eligible for the tax incentive include:
- Development of processes and products
- Technical issues
- Old and new technology integration
- Consulting studies
- Existing technologies using new applications
The SR&ED Tax Incentive
Enrolling in the tax program is all about receiving a benefit for eligible work activities, hence they come in three different forms:
- Investment Tax Credit (ITC)
- Income Tax reduction
- Refund
This tax incentive can reduce a company’s tax liability for the current or future year by the pool of expenditures for up to 20 years. The ITC can be used to reduce the company’s tax bill or, if there is a surplus, receive a refund.
Hence to claim, you should use a qualified SR&ED tax advisor. Therefore they are all experienced and have the expertise to guide you through the fund your business project’s filling process.
This will include the following:
- T661 Form: This is to claim your SR&ED expenditures
- T2 SCH 31 Form: This is for your corporate investment tax credits
- T2038: Individual investment tax credits
- Company Tax Returns: These will be included in the filing.
- Technical Narrative: This explains your business activity and how it meets the requirements to claim the tax credit.
- Cost Calculation: An explanation of how you calculated the final amount being claimed.
The SR&ED is a great source of funding provided by the Canadian government and should be taken advantage of to grow your company. Use an SR&ED consultant to help you navigate this program and reap the benefits as it enables your company to reach its goals and prosper.
Get The Fund And Grow Your Business:
If you like to gather the source to fund your business, the first thing you must do is prepare a good presentation. Hence without a proper presentation, funding for the business gathering is going to be much tougher. And when you are using this model, your calculations are going to be much more accurate and final.
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