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Scientific Research and Experimental Development Tax Incentive

Planning for your Scientific Research and Experimental Development (SR&ED) must take place in advance of actual research and development. This tax incentive program provides individuals, partnerships and corporations with possible cash refunds or reduction in taxes payable. The potential investment tax credit could total 15-35% of qualified expenditures.

The reporting deadline is generally 18 months after the company’s tax year end. More specifically, the deadline is 12 months after the filing due date for the year in which the expense was occurred.

While 18 months may seem like a gracious period of time to prepare SR&ED claims, expenditures are subject to review. The review process can take upwards of 6 months and therefore it is suggested to submit earlier to have recollection.

Is it SR&ED worthy?

Furthermore, expenditures must qualify under the SR&ED terms and the following questions must be asked:

  1. Does the work meet the definition of SR&ED? Typical arts or humanity work does not count. The following questions can help identify this.
    1. Was there a scientific or technological uncertainty? Whereby the problem could not be solved by standard practice, or there was a limitation of existing technology.
    2. Was a hypothesis created to eliminate the uncertainty? This can typically be the new invention at hand, or the idea of how to overcome the uncertainty.
    3. Was there a scientific procedure or method in solving the problem? Proof must be shown that the hypothesis was tested and further modified by testing results.
    4. Was a scientific or technological advancement the result of the work? This can include learnt outcomes of success or failure. As well as advancing the technology. Sometimes innovation does not necessarily represent a technological advancement. Changing the shape of a window is novel, but it is still a window.
    5. Were records of testing the hypothesis and results kept?
  2. If the work does meet the definition, what amount of the work does qualify? The following questions can help answer.
    1. How much work was performed as support work? This can include engineering, design, programming, data collection, etc.
    2. How much work is excluded, and not deemed support work? This includes market research, sales, QA, etc. For mining/oil/gas, this can include prospecting and exploration.
    3. What is the overall scope of the SR&ED project? This may not be inline with the company definition of the project. The duration start of a SR&ED project is when the technical uncertainty has been defined. The end is when the uncertainty has been removed.

Expenditures

First off, the rules vary from province to province and it is important to understand how they affect British Columbians in particular. The expenditures which are allowed to be claimed can be carried forward indefinitely. This includes: salaries, materials, prototypes, contract work, university costs, overhead (can be 40-50% of project) and certain testing. Work related to debugging is not considered under SR&ED. Coined the ‘Scientific research and experimental development tax credit’ CCPCs may claim a refundable tax credit for the lesser of:

  • up to 10% of the expenditure limit (generally $3 million), or,
  • corporation’s SR&ED qualified B.C. expenditures for the tax year

 

Furthermore, a non-refundable credit may be claimed for those expenditures in excess of the limit. This amount is 10% of the qualified expenditure minus the refundable amount and any amount renounced for that year. The non-refundable amount can be carried forward 10 years or back three years.

More information is available from the BC Government on their SR&ED page.

Contact one of our public business accountants for a free consultation to understand how your SR&ED claim can be successful.

Capital Gains Exemption

Looking for ways to decrease your taxable income? If you have sold a business, or shares in a business, and are thinking about selling a business, the Capital Gains Exemption may be right for you.

Under the Income Tax Act, an individual can claim a lifetime capital gains exemption (LCGE) to reduce the amount of taxable income made from such an arm’s length sale. The current amount for 2014 is $800,000 and will rise to $813,600 in 2015 to account for inflation​ – which is a cumulative amount over your lifetime. Individuals must include the capital gain made from the sale as total income (keeping in mind that half of capital gains are taxable), and then claim the deduction.

There are limits to the type of sales which are eligible for the exemption, and are described as such:

  • Sale of shares of a qualified small business corporation (QSBC)
  • Sale of a qualifying farm
  • Sale of a qualifying fishing property

In order for the shares to qualify for the exemption the business must have been a small business corporation at the time of disposal. This means the company is defined as a Canadian controlled private corporation (CCPC) and that 90% of its assets on a fair market value basis are used in the active business primarily located in Canada. In addition to being a small business corporation, during the 24 months prior to the disposal, 50% of its fair market assets needed to be used principally in a business carried out in Canada. It is recommended to move assets which do not qualify (such as stocks, bonds and rental property) outside of the business to meet the 24 month and disposal requirements.

For the 24 months before the disposition, the shares must not have been owned by any one else, other than a person or partnership related to the individual. Transferring the shares from a spouse, your children or even from a “family trust” will qualify under the 24 month period.

For example, if an individual sold their personally owned company for $1M and realized a gain of $500,000, they would need to declare $250,000 in capital gains under their total income and assuming a 46% tax rate, pay $115,000 in additional taxes. The exemption would allow the individual to apply $500,000 of their lifetime capital gains exemption and avoid $115,000 in taxes. Furthermore, the individual has a remaining $300,000 of the exemption moving forward.

There are other restrictions and tax implications. The prior year allowable business investment losses (ABIL) and cumulative net investment losses (CNIL) are used as reductions to the Capital Gain Exemption calculation. There is also an alternative minimum tax (AMT) calculation that might trigger taxes payable.
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For tax planning purposes, you will want to consider the timing of your sale to meet the requirements outlined. Get in touch with Complete Accounting, or book a free consultation online to meet with us.

 

First-Time Home Buyers’ Tax Credit

Since January 27, 2009, qualifying home purchases can result in a $750 non-refundable First-Time Home Buyer’s tax credit.   This credit is not just available to first-time homebuyers.  It is also available to existing homeowners provided someone with the Disability Tax Credit (DTC) benefits from the new purchase.

If you purchased a home and think you may have missed out on this credit we can review your income tax returns and file a prior year adjustment if necessary.  If someone in your household has a disability but did not apply for the DTC, we can also help file prior year adjustments to claim the DTC as well as the First-Time Home Buyer tax credit.  The DTC is a much more valuable tax credit that carries additional benefits so make sure you don’t make any assumptions about not qualifying.

Visit our contact page to see how you can book an appointment with one of our experienced accountants in Surrey, Langley, Kelowna or Penticton http://www.completeaccounting.ca/contact/.

RRSP Contributions and Severance

If you were laid off from work in 2013 and received a large severance package, make sure to do your tax planning before the end of February.  If you have substantial RRSP contribution room you may want to max out your contributions.  If you don’t have a new source of income in 2014 you could even remove some of your RRSPs in order to make the RRSP contribution.  Doing so can shift your high income in 2013 to a potentially lower tax bracket in 2014.

If you would like professional tax planning this year please book an appointment at our Surrey Accounting office to speak with one of our designated accountants.

 

Accounting Mascot & Security System

Here’s a picture of our new Complete Accounting Solutions mascot.  Her name is Maggie and she also doubles as another security system.

If you like our website please visit our homepage and click on the facebook and google like icons at the bottom of the page http://www.completeaccounting.ca/ .

Accounting_Mascot_Maggie

 

 

Tax Deadline April 30th vs. June 15th

The tax deadline of April 30th is fast approaching. If you’ve waited to the last minute to prepare your income tax return you are likely worried about late filing penalties and late payment interest charges. One thing to remember is that penalties and interest charges (apart from installment interest charges), are calculated on the amount owing as of the filing deadline. If you have a rough idea of what you owe, you can make a payment in advance to reduce or eliminate the amount used in the penalty and interest calculation.

If you have any self-employment activity to report you will receive a filing extension through to June 15th. The payment is still due April 30th so interest charges will still apply, but the late filing penalty is not applicable so long as the return is filed by June 15th.

To request a free 1/2hr consult visit http://www.completeaccounting.ca/results/free-consultation/