It is not a stretch to see farmers as scientists involved in combining natural elements to create new ones.
Farmers provide the base ingredients for many mixtures, including cooking oils, sweetening agents, spirits and a portion of the fuels that power our vehicles.
It is equally natural to think that some of your farming activities might qualify for generous federal and provincial government scientific research and experimental development (SR&ED) tax incentives.
Any Canadian controlled private corporation (CCPC), large or small, can earn an investment tax credit (ITC) of 35 percent up to the first $3 million of qualified SR&ED expenditures.
Other structures, such as partnerships, sole proprietorships and trusts, may earn an ITC of 20 percent of qualified expenditures but effective next year, this rate drops to 15 percent.
CCPCs are entitled to a full refund while other entities, such as a trust or proprietorship, may qualify for a partial refund, but only after applying any ITCs against taxes payable.
Currently, expenditures such as wages, materials, machinery, equipment, some overhead and SR&ED contracts are considered acceptable expenses under the program.
Consumer testing is also an eligible expense if used as an analytical part of the SR&ED process. The 2012 federal budget introduced draft legislation to eliminate capital expenditures, leasing and shared used of equipment as eligible SR&ED expenditures.
Projects to improve breeding, feed or crop development are prime examples of activities that might qualify. Generally, if you developed a new product or process or have found a way to reduce your environmental impact, these activities may also qualify as SR&ED.
If you have customized your farm equipment or have found innovative ways to improve your energy, water or nutrient consumption, these too will pass the test of acceptable SR&ED activities.
Any farming activity may qualify involving plant or livestock, poultry and swine genetics, greenhouses and vineyards.
You may have been doing something all along in your farming operation that qualifies for SR&ED incentives and were just not aware of it.
SR&ED is defined under the Income Tax Act as “a systematic investigation or search carried out in the field of science or technology by means of experiment or analysis.”
There are criteria that must be met to qualify for R&D incentives:
- The activity can’t be common knowledge and there is a degree of uncertainty to the outcome.
- The outcome does not have to be successful — you have to demonstrate you undertook the activity in an attempt to achieve a desired result.
- You need to document your activity by the norms required of general scientific research — i.e., “a systematic investigation or search going from hypothesis formulation, through testing of the hypothesis by experimentation or analysis, to the statement of logical conclusions.”
- You need to record and document your activity to support your claim.