Canada can rightly boast having some of the most innovative startups and entrepreneurs in the world. A combination of incredible homegrown talent, welcoming work policies, and innovation-friendly business tax code at both the federal and provincial levels create a wealth of opportunities for founders to make their dreams a reality. 

Ace among these funding programs is the Scientific Research & Experimental Development (SR&ED) tax credit, which is the largest single source of government funding for industrial R&D offered in Canada (continue reading to see how this applies to startup founders). SR&ED—pronounced just ‘SHRED’—is a federal tax incentive program that gives Canadian businesses across sectors access to both refundable and non-refundable tax credits to help cover the costs of research and development (R&D).

To qualify for SR&ED, organizations must aim to create new (or improve existing) products, processes, principles, methodologies or materials. Specifically, the CRA outlines the following criteria:

Technological Advancement

To meet this standard, the project must generate information that advances understanding of the underlying technologies. In a business context, this means that when new or improved material, device, product or process is created, it must embody a technological advancement in order to be eligible. 

Technological Uncertainty

A project must also directly address technological obstacles (or uncertainties) that cannot be overcome by applying the techniques, procedures and data that are generally accessible to competent professionals in the field. In other words, if there is already a technique that accomplishes the stated task, new processes for accomplishing the goal wouldn’t qualify for SR&ED. 

Technical Content

Claimants must provide proof that a systematic investigation was executed. This entails going from identification and articulation of the scientific or technological obstacles to hypothesis formulation, through testing by experimentation or analysis, to the statement of logical conclusions. In a business context, this requires that the objectives of the work must be clearly stated at an early stage in the project’s evolution, and the method of addressing the obstacle/uncertainty by experimentation or analysis must be clearly set out.

From there, claimants can recover up to 64 percent of qualifying expenditures. These include:

• Salaries for those directly involved in SR&ED eligible work
• Subcontractor costs for directly involved SR&ED eligible work
• Material costs required to achieve technological advancement(s)

What this means is most of a founder’s product development costs could be recouped under SR&ED. 

But first, accurately defining the nature of your business is critical. While this can take many forms—like characterizing your organization based on your product’s Technology Readiness Level—the CRA identifies five different corporation types to designate the various tax-filing organizations:

• Canadian-controlled private corporations (CCPCs)
• Other private corporations
• Public corporations
• Corporation controlled by a public corporations
• Other corporations

That first designation—the CCPC—is an important designation for any startup founder to bear in mind. Businesses that meet CCPC criteria can potentially take advantage of a wealth of support from the Canadian federal government and provinces. Specifically, CCPCs qualify for valuable tax deductions, which are awarded based on active businesses income, as well as tax credits (ie. SR&ED). 

What is a CCPC?

The simplest way to look at a CCPC is that it’s a fully private corporation that’s either created in Canada or “resident” on Canadian soil from June 18, 1971 (per the Income Tax Act) through the applicable tax year. Additional key qualifications include:

• The business is not controlled by one or more non-Candian residents
• No public corporations—other than a prescribed Venture Capital corporation, per Regulation 6700—has direct or indirect control over the corporation
• No controlling parties lists the corporation’s shares on a designated stock exchange outside of Canada
• To that end, no class of shares or capital stocks for the organization are listed on any stock exchange

What are the tax benefits of a CCPC?

The first (and primary) advantage that the government offers many CCPCs is the Small Business Deduction (SBD). This benefit provides a preferential deduction rate on the first $500,000 in active business income a CCPC accrues in Canada. 

The total deductions are calculated via the T2 Corporate Income Tax form that businesses file at the end of each fiscal year. While actually navigating the application itself can be tricky and laborious, the deductions are determined by multiplying the deduction rate by the corporation’s active business income (line 400), taxable income (line 405) business limit for the tax year (line 410) and reduced business limit for the tax year (line 425), respectively. The lowest total of these four calculations is then plugged into line 430 and considered the deductions for that tax year. 

Of course, as CCPCs grow past the $500,000 income threshold, they will find additional avenues for non-dilutive federal support—including SR&ED, which is especially valuable for businesses focused heavily on R&D.

CCPC & SR&ED

As a baseline, CCPCs can claim up to 64 percent of recoverable amounts on qualifying expenditure as they relate to salaries, versus only 36 percent for non-CCPC. Additionally, CCPCs can recover up to 32 percent of subcontractors and 42 percent of materials costs that qualify for SR&ED. 

There’s also the SR&ED Income Tax Credit that relates specifically to an organization’s corporate income tax. Along with enjoying the SBD, CCPCs can enjoy an enhanced SR&ED ITC rate on upwards of $3 million worth of qualifying research and development expenditures. This plays out at 35 percent of annual SR&ED expenditures, opposed to a 15 percent standard rate for non-CCPC organizations.

It’s worth noting that the expenditure limit is capped at $3 million when a CCPC’s taxable revenue is less than $10 million in the prior tax year, while the limit starts to phase out completely once revenue reaches $50 million annually. 

How to qualify

When you’re incorporating your business, you’ll inevitably need to navigate additional criteria on the path to gaining your CCPC designation, depending on where exactly in Canada your founders and operations are based. 

Where being a CCPC becomes an asset, however, is when you’re filing your annual income taxes. By partnering with tax professionals that can seamlessly navigate the government forms and financial data that’s key to your T2 filing, you have a better chance of maximizing your returns and extending your CCPC’s runway.

Best of all, Boast has an unmatched track record of defending claims in the face of audits or reassessments, allowing you to rest assured that your filing is not just maximized, but taken care of. 

Boast brings a complete solution to maximize your tax incentive claims and eliminate the difficulty and mystery of traditional offerings. Boast securely integrates with hundreds of other systems to make capturing and qualifying your SR&ED investments easy, and real-time. Request a demo with the team today to get started.