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Comparing Research Tax Credits – U.S. (R&E) vs. Canada (SR&ED)

By April 6, 2020 April 22nd, 2020

Background 

There are a number of parallels between the US Research and Experimentation (R&E) Tax Credit Program and the Canadian Scientific Research & Experimental Development (SR&ED) Program. Despite some fundamental similarities, the programs are different in eligibility requirements, as well as qualifying types of costs. 

In general, the U.S. program includes a much broader definition of qualified ** research activities and more recently has had a number of Taxpayer friendly court cases that allow for a broader range of qualified expenses to be captured. The current environment in the U.S. is extremely Taxpayer friendly for Companies to take advantage of this program. 

Below, we examine some key areas of both the U.S. and Canada’s R&D tax credit systems, including comments on the similarities and differences of the two programs. 

Discussion 

Open Tax Years / Scope 
In the U.S., Taxpayers can claim the credit on all open tax years not barred by the statute of limitations (3 years from the date of filing).  In Canada, Taxpayers are limited to claim only on timely returns or amended returns (18 months after fiscal year-end). 

General Definition 

In the U.S. tax credit system, improving the functionality of a product or process does qualify for the RTC. This runs counter to the SR&ED program, which generally does not award tax credits to improving the functionality of an existing product unless some level of technological uncertainty was involved and the work advanced either at the start of technology or scientific knowledge. 

Thus, the U.S. tax credit can include activities on developing new or improved products, while Canada’s program is more focused on discovering new technological or scientific knowledge or information. 

U.S. definition includes the development of a new or improved business component 

✓ Product 
✓ Process 
✓ Computer software 
✓ Technique 
✓ Formula 
✓ Invention 

The Canadian definition describes a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is 

(a) basic research
(b) applied research
(c) experimental development

Tax Credit Rates 

In general, the U.S. federal R&E tax credit can be 7% to 10% of the qualified expenses. 

The SR&ED federal rate can be either 15% or 35% (depending on company classification), but the pool of qualified activities and expenditures is not as encompassing as the U.S. 

Eligible Costs 

In the U.S., expenses include “supplies” which are any tangible property (other than land or land improvements). This property can be either qualified research expenses such as consumables, or qualified supplies such as materials used or destroyed as testing materials or prototypes. In Canada, the terminology used is “materials”. The requirement is that the material is consumed, absorbed or transformed for SR&ED purposes. 

The term “supplies” has a much broader definition and terminology. 

U.S. Qualified Research Expenses (QREs) include; 

1. Wages 

  • Directly engaged, supporting or supervising 

2. Supplies 

  • Used or consumed 

3. Sub-Contractors (at 65%) 

  • Supporting or conducting R&D on your behalf 

4. Capital Items (TD9680) 

  • Self-constructed items where design uncertainty can only be resolved by building and testing 

SR&ED Expenditures include; 

1. Wages 

  • Directly engaged employees and first-line supervision 

2. Materials 

  • Consumed, transformed or absorbed in the SR&ED work 

3. Contractors (at 80%) 

  • Costs that are commensurate with the needs and directly in support of the SR&ED work 

4. Overhead Costs 

  • Typically calculated at 55% of direct wages 

5. Capital Items 

  • Not eligible after 2014 

DST Advantage 

DST’s partners have first-hand experience in preparing and defending Canadian SR&ED claims, in addition to U.S. RTC claims. 

Our team can offer unsurpassed advice and assistance to our clients with cross-border operations, with the following; 

  1. Assisting Taxpayers with cross-border operations in determining optimal locations to conduct research or development activities; 
  2. Analyzing existing research activities and planning initiatives to maximize research tax credit potentials; and 
  3. Tailoring side-by-side comparison of key facts with respect to research tax credits and other tax credit or incentive initiatives. 

For more information please call 832-320-2200 

www.dstadvisorygroup.com 

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