How SR&ED Tax Credits can Support Your Grow
The cannabis industry is very new, and its political history has led to a dearth of knowledge available on the plant. By necessity, most growers are doing some sort of research or testing in hopes of increasing potency, raising yields, or reducing costs. But this research can be costly, especially if things don’t quite go as planned.
Canada’s Scientific Research and Experimental Development (SR&ED) program and parallel provincial programs provide refundable tax credits to help fund this research. (Yup, REFUNDABLE. You can get a cheque back, even if your corporation pays no taxes). The Canada Revenue Agency administers these programs for most provinces, so applying for these credits is a matter of including the right forms in your annual corporate tax return.
What You Can Claim
Expenses are generally eligible if they were incurred directly as part of the research. Specifically, claims can include:
- Materials consumed by the testing or wasted when tests failed (>40% return on approved claims)
- Salaries for the portion of their time that employees spent directly engaged in or supervising the work (>60% return)
- Contractor fees for direct contributions to the research (>30% return)
Note that if personnel perform a combination of SR&ED and non-SR&ED work, you can only claim their SR&ED time. Likewise, if your materials remain useful in the eventual solution or other projects, they will not be eligible. So you might claim the costs of a lighting system that did not work, but not the cost of hardware that you continued to use after the tests.
How to Qualify
In a nutshell, work is eligible if the only way to know the answer is to follow the scientific process of Hypotheses and Experiments. Work is not eligible if you can find the answer on Google, industry publications, or any other publicly-available resource. To decide whether your work qualifies, CRA asks 5 questions:
- Was there a scientific or a technological uncertainty?
Did you have a question that could not be answered using available knowledge resources?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Did you consciously form a theory about how to answer the question?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
Did you use experiments or tests to see if your theory was right?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
Were you trying to learn something or expand the knowledge base on the subject?
- Was a record of the hypotheses tested and the results kept as the work progressed?
Did you document the work to demonstrate the hypotheses, tests, and analysis of results that helped you to answer the question?
How to Apply
CRA will tell you that the process is so simple that anyone can do it, but this is rarely the case. Very few accountants have the scientific background necessary to properly document the claim or assess the eligibility of specific expenses. Large accounting firms have their own in-house SR&ED consultants, but other firms have referral agreements with practitioners or expect the client to supply the project reports.
The most practical first step is to talk to a consultant like LoveMJ, unless you already have experience with the program. SR&ED Consultants and Practitioners know the tricks and phrases that CRA uses to deem work ineligible, and can help you ensure that your claim won’t be rejected due to a poor choice of words. They can also help you set up your systems and processes to ensure that you have the right documentation to support your claim.
When to Start
In short, find a consultant today.
If you have not yet started your research or if you aren’t sure whether your work will qualify, we can identify opportunities and help you structure the project to ensure eligibility. We can also help you with Pre-Claim Consultations or Pre-Claim Reviews with CRA, which increase certainty about whether a project will qualify.
How to Learn More
Contact LoveMJ today to learn more about the SR&ED program and how your company can benefit.