How much tax credits for SR & ED (SME) ?
Calculating the SR & ED tax credit for an SME
The R & D tax credit is the largest and most lucrative tax credit program for the development of technology in Canada. Accounting and tax credit calculations are relatively complex processes. Therefore we present a case study as an example of some of the variables to be taken into account.
This page excludes eligibility and documentation issues. Here we focus solely on tax credit calculations for a small or medium-sized enterprise (SME) with salary-type and subcontractor-type expenditures. Please note that tax credit rates, exclusion levels and refunds are different for larger companies.
1-Initial facts
John Smith performed SR & ED eligible work for 50% of his time during the year. His assistant was 100% SR & ED. They both worked in Quebec. John’s annual salary for this company was $ 100,000, his assistant has received $ 70,000. John hired a Quebec subcontractor for his SR & ED activities. The subcontractor billed $ 40,000 for SR & ED. The steps for calculating credits are as follows:
2-Calculations
Important Notice: These calculations are for presentation purposes only. Before evaluating or submitting a claim you should contact a tax specialist, such as R&D Action, to validate the calculations in your specific situation. We also suggest you consult the relevant policies available on the Canada Revenue Agency (CRA) website.
All the work is done in Quebec:
Provincial Credit:
Step 1 – Salary base (SR & ED part of salary): ($ 100,000 x 50%) + $ 70,000 = $ 120,000
Step 2 – Subcontractor (Provincial) : 50% of invoices are claimable: $ 40,000 x 50% = $ 20,000
Step 3 – Total SR & ED Expenditures (Provincial): $ 120,000 + 20,000 = $ 140,000
Step 4 – Deduct the Quebec Exclusion Level on SR & ED Expenditures: $ 140,000 – $ 50,000 = $ 90,000
Step 5 – Quebec Total refundable tax credits for SR & ED: $ 90,000 x 30% = $ 27,000
Federal credit:
Step 6 – Salary base (SR & ED part of salary): ($ 100,000 x 50%) + $ 70,000 = $ 120,000
Step 7 – Subcontractor (Federal): 80% of invoices are due: $ 40,000 x 80% = $ 32,000
Step 8 – Prescribed Replacement Amount – 55% of SR & ED Salary: $ 120,000 x 55% = $ 66,000
Step 9 – Total SR & ED Expenditures (Federal): $ 120,000 + $ 32,000 + $ 66,000 = $ 218,000
Step 10 – Less note [1]: Provincial SR & ED tax credit of the year: $ 218,000 – $ 27,000 = $ 191,000
Step 11 – Total Federal SR & ED Refundable Tax Credits: $ 191,000 x 35% = $ 66,850
Total refundable credit :
Step 12 – Total SR & ED Investment Tax Credit (ITC): $ 27,000 + $ 66,850 = $ 93,850
Net charge for this SME:
Actual SR & ED Expenditures = $ 50,000 + $ 70,000 + $ 40,000 = $ 160,000
Net Expenditure after ITC: $ 160,000 – $ 93,850 = $ 66,150 (41.34% of actual R & D expenditures)
Thus, in this example, the after-credit charge represents 41.34% of the total actual SR & ED expenditures.
The net effect of Quebec’s $ 50,000 exclusion level on SR & ED expenditures is felt more deeply by small claimants. For example, the credit on $ 10,000 of wages is worth:
- 54.25% (10,000 x 1.55 + 35% = $ 5,425) to the first $ 50,000, and
- 73.75% ((10,000 x 1.55 – (10,000 x 30%)) x 35%) + 3,000) = $ 7,375) for amounts that exceed the threshold of $ 50,000.
So at a rate of 54.25%, it is worth claiming. But credit is much more interesting (73.75%) when you spend more than the exclusion level.
3-How to maximize the amount of my credit?
The tax credit rates for SMEs are fixed (Fed: 35%, Que: 30%), so is the replacement amount (55%). The research time and salary are the factors to plan and optimize in order to maximize the tax credit.
In conclusion in this context, you may need to revise the traditional tax planning strategies you did put in place. This is where SR & ED experts from R&D Action can help. Our specialists provide the tax planning assessments and strategies that professionals and other organizations conducting SR & ED projects need to optimize their claims and avoid revisions that delay their return.
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[1] The provincial credit must be removed from the calculation before calculating the federal ITC. Since the provincial credit is considered government assistance, the federal government will not allocate ITCs for SR & ED on this amount.
