Taxes and SHRED: What Canadian small businesses need to know

Businesses are always looking for ways to innovate, but the process can be difficult without the necessary funds. Luckily, the Canada Revenue Agency has a program that encourages research and development for Canadian-controlled private corporations. The Scientific Research and Experimental Development Tax Credit program – also known as SR&ED or SHRED – offers companies an investment tax credit of 35 percent up to the first $3 million in qualified expenses for these purposes carried out in Canada and 20 percent on any additional costs. Let’s take a closer look at SHRED:

It’s refundable

Organizations often worry about making an investment and getting no return on their expenses. SHRED is a refundable tax credit, which means companies will receive cash back even if the endeavor doesn’t make a profit.

Furthermore, all types of businesses are eligible for this program, as long as their project invokes the discovery of new information and fits under the umbrella of work that qualifies: applied research, experimental development, basic research and support work.

All about the process

Although companies are used to creating project proposals, SHRED does not require entrepreneurs to do so to receive the tax credit. Instead, business owners can design and complete their project – while following the program’s qualifications – and file their claim on its conclusion. Procedures don’t have to be successful, they just have to be developed in search of new information.

Organizations should be sure to fully document every step of the process for the CRA and their own purposes. Having evidence of the procedure will help when companies are filing their claims and will assist with future research.

Understanding provinces and territories

While the federal government is responsible for SHRED, each distinct area of Canada may also provide a tax credit to qualifying companies that are carrying out the program in their province. These territories have their own individual investment tax credit rates and may also offer alternative or supplemental research and development investment programs. For example, Alberta has its own science and research investments grant program and the Northwest Territories offer a 15 percent tax credit under the Risk Capital Investment Tax Credits Act.

SHRED eligibility

It’s crucial for Canadian organizations to understand if their endeavor qualifies for SHRED prior to beginning their project. If their work falls under technological advancement, advancement of knowledge for its own sake or for a practical purpose or engineering, design, mathematical analysis, computer programming or data analysis, then it is eligible for the SHRED tax credit.

However, if the project is considered marketing and sales, research in social sciences and humanities, commercial production, petroleum or routine data collection, it would not qualify for the incentive.

The CRA strongly believes in research and development activities as a means for innovation in Canada. It’s important for businesses to understand the qualifications of the SHRED program to ensure they’re eligible for the tax refund.

Next Steps

Visit the CRA to learn more information about the Scientific Research and Experimental Development (SR&ED) Program, including what you need to know to claim SR&ED tax incentives.