Making the most of R&D tax incentives

Stock photo courtesy Catax Canada.

Canada’s engineering industry represents one of the most innovative sectors in the country and is responsible for construction and infrastructure projects of crucial importance to the economy. Yet, many consulting engineers are not aware of available tax incentives that can be reinvested in this kind of work and of the assistance to which they may be eligible.

It is worthwhile to understand the relevant scheme, what kind of activity qualifies for it and how to go about claiming it.

Tax credits can go a long way in easing the costs of an engineering project.

The SR&ED program

Tax credits for innovation are available in Canada through the Scientific Research & Experimental Development (SR&ED) program. Taking advantage of these credits can go a long way towards easing the costs of an engineering project.

Many professional engineers wrongly assume such tax incentives awarded for research and development (R&D) are the preserve of the scientific community, but the federal government has been very careful not to exclude any sector. The rules are actually very generic and can apply to many industries.

Further, contractor costs also qualify for incentives. So, firms using third-party engineering expertise for R&D-related activity can benefit.

Indeed, the cost of hiring consulting engineers can form part of an overall SR&ED claim. With this in mind, clients should be asking engineers to provide evidence of their R&D work to support their own claims.

If you are not being asked about this, but you know you are performing work that is likely to qualify, then there is an opportunity to add more value by alerting that client to the opportunity to claim. To this end, it’s worthwhile for all consulting engineers to get a grip on how the program works.

For one thing, it is not to be confused with the Industrial Research Assistance Program (IRAP), which makes government-funded grants available to small and medium enterprises (SMES), rather than tax incentives for R&D.

That said, the SR&ED regime for SMEs has improved recently. There has never been a better time to claim.

The cost of hiring consulting engineers can form part of an overall SR&ED claim.

Work that qualifies

The SR&ED program’s rewarding tax incentive for innovation allows businesses to claim back up to 41.5% of expenses incurred through R&D-related activity. It represents a combination of federal and provincial incentives, so it varies by province.

Not every cost associated with R&D can be included in a claim. The main qualifying expenses include staff costs, salaries, materials and payments to contractors and third parties.

Consulting engineering firms and individual professionals are likely to perform qualifying SR&ED activity. By way of example, consider the ongoing development of renewable energy sources. While Canada has a long history of fossil fuels, it is also becoming one of the world’s strongest champions of renewable energy, with much innovation in this sector that would qualify for SR&ED incentives.

From the point of generation to load centres, each facility needed to deliver clean energy to homes and businesses requires new technology and processes. The high-voltage direct current (HVDC) transmission market, for instance, is one area of the energy industry that is set to expand in the coming years, as innovation steadily increases.

The incentive for a private business is received as a cash payment. For publicly traded companies, it is a credit to be offset against outstanding taxes.

The best way to check what qualifies is to work with seasoned tax advisers who are experienced in SR&ED claims. By doing so, consulting engineers have a strong opportunity to improve the value they offer to their clients, guiding them as to where they should be using and benefitting from the program.

Broadly speaking, there are three simple tests to identify what innovations might qualify for these tax incentives. The work must:

• further technical knowledge or create advancement in the industry.
• overcome scientific or technological uncertainties.
• do something, by design, that other professionals would find difficult or not obvious.

Businesses can claim up to 18 months after the tax year in which the innovation took place. So, if you didn’t know about the scheme before, there still is a good chance you or your clients could claim substantial amounts retroactively.

And at a time when some businesses are struggling financially due to the COVID-19 pandemic and many projects have been put on hold, now is the perfect moment to make sure you are taking full advantage.

Richard Hoy is president of specialist tax consultancy Catax Canada. He can be reached at richard.hoy@catax.com. This article originally appeared in the March/April 2021 issue of Canadian Consulting Engineer.