SR&ED Tax Credit Program
Manufacturing and processing companies that have qualified expenditures related to research and development activities may be eligible for the very lucrative scientific research & experimental development tax credit. Incorporated Canadian-controlled private corporation (CCPC) can generally claim an investment tax credit (ITC) of 35%, a 100% refund on qualified SR&ED current expenditures and 40% refund for qualified capital expenditures up to a limit of $3 million of research & development expenses and 20% on any excess amount. Qualifying expenditures include not only materials and equipments, but also salaries and wages, third party payments, SR&ED contracts, and some overhead costs. Additionally, there is also a provincial investment tax credit, in Ontario this rate is 10%.
The ITC rate for other Canadian corporations, sole proprietorships, general partnerships and trusts is 20% and 40% of the expenditure is refundable. So as a tech company in Waterloo, it is probably a good idea to become incorporated not just for the increase credit rate, but for many other significant tax advantages. To learn more about these advantages please consult our article on sole proprietorship versus corporation. This refundable credit also means that your business does not need an operating profit in order to get the appropriate refund back in cash.
Accelerated Capital Cost Allowance
Manufacturing and processing companies are eligible for a special capital cost allowance known as the accelerated capital cost allowance (ACCA). Much like the regular capital cost allowance where the depreciating value of an asset can be claimed over a period of several years. The accelerated version allows a Hamilton manufacturing and processing company to write off asset in investments in machinery and equipment in the form of a two year straight line depreciation rate. This means that the companies can write off the equipment much faster, allowing them to depreciate the entire value of their investments over a three year period. This is subject to the half-year rule, meaning that 25% of the cost of the asset can be depreciated in the first year, 50% in the second year and 25% in the third year.
This allows approximately 42 cents more per dollar that is invested in eligible machinery and equipments. This generates extra cash flow for these manufacturing companies so they can reinvest in upgrade machinery and production tools so they can become more efficient and remain competitive.
Let’s look at an example:
A manufacturing company purchases a machinery for its assembly line that cost $50,000. The ACCA would allow it to deduct $12,500 in the first year, $25,000 in the second year, and $12,500 in the third year.
Apprenticeship Tax Credits
Manufacturing companies that hire and train young workers as apprentices in certain skilled trades can are eligible for a wide range of apprenticeship related tax credits. The most significant is the apprenticeship training tax credit. The amount for this credit is based on the salaries and wages that are paid to an apprentice. The maximum credit for a single apprentice per year is $10,000 and a maximum of $40,000 over a 48-month period. Employers are also provided with a non-refundable ‘apprenticeship job creation tax credit’ equal to 10 per cent of eligible salaries or a maximum of $2000 per apprentice per year.
If the company is part of the Employment Service (ES) Job Matching, Placement and Incentives program, they will receive an initial $1000 for signing an apprentice, and then an additional $1000 if that apprentice is still working with them for at least six months.
In order to claim these tax credits, these manufacturing and processing corporations must file the form T2SCH55 Ontario Apprenticeship Training Tax Credit along with their T2 Corporation Income Tax Return.
Co-operative Tax Credits
This tax credit is similar to the apprenticeship tax credit in that it subsidizes employers for hiring students for work terms. An employer can claim 25 percent of eligible expenditures related to hiring the student or a maximum of $3,000 for the work term.
To qualify as an eligible work placement:
- The student must be enrolled at an eligible educational institute and performs work for an eligible employer under a qualifying co-operative education program coordinated by their school.
- The student must be involved in work that is in some way related to their field of study and not be just an observer.
- The student is paid for the work and both the employer and educational institution monitors and evaluates the student’s performance
Corporate Tax Rates
For general corporations the federal tax rate is 38 per cent for manufacturing & processing income, active business income and investment income. Hamilton based corporations will also face an Ontario provincial tax rate of 10 per cent for manufacturing & processing income, and 11.5 per cent for both active business income and investment income.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.