Both the Federal and Provincial governments have realized
the importance of Research and Development ("R&D") in keeping Canada
competitive with the rest of the world. In order to promote R&D
in Canada, they have provided a variety of income tax incentives. However,
in order to qualify for these government incentives, a complex set
of criteria and guidelines must be met. These guidelines and the benefits
of meeting these guidelines are briefly described in the following
article.
The Benefit of R&D
The following deductions and incentives are available to corporations
that carry on qualifying R&D in Ontario.
Qualifying
Canadian Controlled Corporations ("CCPC's"") are entitled
to a 35% ITC on current R&D expenditures. The ITC can be applied
against federal taxes payable in that year or refunded to the claimant
in most cases. Other corporations that do not qualify as CCPC's, are
entitled to a 20% ITC with no refundability provision.
The
proxy election adds a notional overhead amount of 65% of the qualifying
R&D salaries and wages to the expenditure amount eligible for ITC's.
Ontario
provides a special deduction from Ontario income for qualifying R&D
expenditures, varying from 25% - 52.5% of the expense.
Effective February 29, 2000, this deduction has been eliminated.
Instead, the Ontario government will not tax the prior years Federal ITC
that must be added back to income for Federal purposes.
The OITC is a 10% refundable tax
credit for eligible R&D expenditures
incurred in Ontario. The OITC is available to corporations with
taxable income of less than $200,000 and taxable paid-up capital of
less than $25,000,000.
Eligible R&D Work
Revenue Canada has published a lengthy guideline known as
Information Circular 86-4R3 which sets forth their interpretation of
the R&D rules. Although it is extremely lengthy and complex, any
company considering claiming R&D credits should read through the
circular.
Although each corporation must be individually analyzed to determine
whether they may qualify for R&D, there are three basic criteria
that must be met before further investigation is warranted. The three
basic criteria that must be met are as follows:
(1) Scientific or technological
advancement
(2) Scientific or technological uncertainty
(3) Scientific or technological content
A project must embody scientific or technological
advancement through the generation of new knowledge or information
which advances our understanding of scientific relations or technologies.
In essence, this means that the advancement can be measured. The
product must be faster, better or cheaper. It is important that an
advancement is measured from a standard practice. The company must
identify the standard practice and go beyond that practice.
The company must document this departure from standard practice. Thus
the researcher should document that he is trying to develop something two
times faster or twice as dense etc.
A project must also show that it involves scientific
or technological uncertainty whose resolution has been attempted
or achieved, usually through a combination of analysis and experiment
and a systematic approach.
Technological uncertainty not only means situations where it is uncertain whether
goals can be achieved at all, but also encompasses situations where the corporation
may be confident that the goals can be achieved, but may be uncertain which
of the several alternatives (ie: paths, routes, approaches, equipment configurations
etc.) will either work at all, or be feasible in order to meet desired specifications
and/or cost targets.
It is extremely important that a company documents the uncertainty
of a project prior to its initiation, so that Revenue Canada can be
satisfied that a project that has achieved its goals had uncertainty
at the outset.
The final criteria embodies scientific and technical
content, which means the activity must reflect a systematic process
of hypothesis formulation, analysis, and/or experiment. It must also
be shown that the work was performed by competent persons who have
relevant experience in science, technology, or the related disciplines
appropriate to the field of endeavour.
Essentially Revenue Canada is asking that the researchers keep
a lab record of what has been done.
As
noted several times above, documentation is as important to the process
as the research itself. A project worksheet and employee timesheets
should be completed for each project.
The above discussion is general
in nature and is not intended
to provide income tax advice. |
