Innovators in automating processes are missing out on a rewarding tax incentive

Canada’s automation specialists represent one of the most innovation-intensive sectors in the economy. Yet in this industry you can still find businesses that are not even aware that tax incentives exist for this kind of work.

By Richard Hoy

Tax credits for innovation are available in Canada through the Scientific Research & Experimental Development (SR&ED) program and claiming can be incredibly rewarding.

Businesses are frequently surprised by what qualifies, because ‘lab coat syndrome’ — the assumption that innovation tax incentives are only for scientists — still persists.

In fact, all types of companies can claim, and innovation work that involves process, devices and automation falls squarely within the scope of R&D. Contractor costs qualify too, so companies using outside engineering firms to carry out eligible work can still claim.

So, what exactly is SR&ED?

This rewarding innovation tax incentive allows businesses to claim back up to 41.5% of expenses spent on innovation. This is a combination of federal and provincial incentives and it varies by province.

Not every cost associated with R&D can be included in a claim, however, the main qualifying expenses include staff costs, salaries, payments to contractors and third parties, and materials.

The tax incentive for a private Canadian business is received as a cash payment, and for publicly traded companies it is a credit to be offset against outstanding taxes.

Seasoned tax advisers with experience of SR&ED claims know what qualifies, so businesses don’t need to get caught up in the detail. There are three simple tests that must be met for innovation to qualify for these incentives.

The work must:

• further technical knowledge or create advancement in their industry;
• overcome scientific or technological uncertainties; and,
• do something, by design, that other people would find hard or not obvious.

Businesses can claim up to 2 years after the tax year in which the innovation took place.

SR&ED is not to be confused with the Industrial Research Assistance Program (IRAP), which is a government-funded grant program available to small and medium size businesses, rather than an R&D tax incentive. The SR&ED regime for SMEs has actually improved recently, so there’s never been a better time to claim.

Richard Hoy is President of specialist tax consultancy Catax Canada. You can reach him at richard.hoy@catax.com.