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1. How can SR&ED tax incentive program benefit your company?

We believe that there are many Canadian companies who are missing an opportunity to benefit from the Scientific Research and Experimental Development (SR&ED) Tax Credit program. They simply do not consider what they do as Research and Development. SR&ED, however, is not confined to "ivory towers". If you are pushing the envelope in your field, you are probably doing SR&ED. If there is a risk that you will not be successful in what you are trying to achieve, you are almost certainly engaged in SR&ED. If you are making improvements to your products or processes, and these changes involve technological uncertainty then you are doing SR&ED. If part of what you do is advancement within your field then you are doing SR&ED.

If your company is a CCPC (Canadian Controlled Private Corporation) then your SR&ED tax credit from CRA is 35% up to the first $2 million of qualified expenditures for SR&ED carried out in Canada, and 20% on any excess amount. The Ontario Government also kicks in 10%, so that your total credit can be almost half of the costs claimed. If, also, you qualify based on the business limit , then the credit is refundable, meaning you will receive a cheque for the full credit, regardless of how much your tax is for the fiscal year in question. CRA is currently committing to turning around a claim of this nature in 120 days.

You can submit an SR&ED claim, for a particular fiscal year, when you file your taxes for that year, or later if you wish. You need to be aware that the SR&ED claim must be filed no later than 18 months after the fiscal year end. (To be safe, CRA advises you to submit it within 16 months. This gives you some leeway to submit missing information, should it be necessary. CRA will not accept any documentation after this 18-month period has expired.)

2. What is Apprenticeship Job Creation Tax Credit (AJCTC)?

If you hire an apprentice, you can receive a tax credit equal to 10% of their salary. The maximum credit is $2,000 per year. You must hire an apprentice who is:

  • in a trade listed under the "Red Seal Trades" or approved by the Minister of Finance;
  • in the first two years of an apprenticeship program registered with a federal, provincial or territorial government;
  • working towards getting a certificate or licence in that trade.

  • You don't have enough taxes payable to deduct all of the AJCTC? Any unused credit may be carried back three years or carried forward twenty years. In the federal budget of October 2006, the Canadian government announced a tax measure aimed at encouraging companies to create jobs for apprentices. The Apprenticeship Job Creation Tax Credit (AJCTC) offers a maximum credit of $2,000 per year for the creation of jobs for apprentices. This credit is claimed on the income-tax return by filling out the appropriate form and sending it, with the income-tax return, to the Canada Revenue Agency (CRA), which will apply the tax measure under the following conditions:
  • The credit is applicable only for apprentices employed by the company on or after May 1, 2006
  • Only apprentices performing a "Red Seal" trade are eligible (the trades of elevator mechanic, plasterer, shovel operator, and heavy equipment operator are excluded)
  • The credit applies for the first 24 months of the apprenticeship
  • The tax credit is equivalent to 10% of the eligible salary paid to eligible apprentices up to a maximum of $2,000 per year for each eligible apprentice
  • If a single apprentice works for more than one employer over a single year, the CRA will ensure that the maximum allocation of $2,000 is not surpassed for a single apprentice
  • Employers will be able to claim the credit on their income-tax returns using form T2038(IND) for independent contractors or form T2SCH31 for companies. These forms indicate the documentation to supply as needed

  • 3. How should we report rental income & expenses?

    If you received income from rental of real estate or other real property, you have to file a statement of income and expenses. If you are a co-owner of the rental property, your share of the rental income or loss will depend on your share of ownership. Generally, you can deduct any reasonable expenses you incur to earn rental income. If you rent part of the building where you live, you can claim the amount of your expenses that relate to the rented part of the building. You have to divide the expenses that relate to the whole property between your personal part and the rented part. You can split the expenses using square metres or the number of rooms you are renting in the building, as long as the split is reasonable

    There are two basic types of expenses:

  • Current expenses: operating expenses that provide a short-term benefit, such as cost of repairs you make to keep a rental property in the same condition as it was when you required it. You can deduct current expenses from your gross rental income in the year you incur them.
  • Capital expenses: providing a benefit that usually lasts for several years, such as costs to acquire a building, furniture, or equipment to use in your rental operation. You cannot deduct the full amount of these expenses in the year you incur them. Instead, you can deduct their cost over a period of several years as capital cost allowance (CCA). The amount of CCA you can claim depends on the type of rental property you own and the date you acquired it.

  • Current expenses normally include:

  • Advertising
  • Insurance
  • Maintenance and repairs
  • Management and administration fees
  • Motor vehicle expenses
  • Office expenses
  • Legal, accounting, and other professional fees
  • Property taxes
  • Salaries, wages, and benefits
  • Travel
  • Utilities
  • Lease cancellation payments

  • You must keep detailed records of all the rental income you earn and the expenses you incur, and have to support your purchases and operating expenses with invoices, receipts, contracts or other supporting documents. You do not have to send the records when you file the return, but you should keep them in case CCRA ask to see them. Records must be kept for six years from the end of the taxation year to which they relate. All or part of your expenses may be disallowed if you do not have receipts or other documents to support them.

    4. What is the $750,000 lifetime Capital Gain Exemption?

    One particular tax planning technique available to business owners selling their private companies is the lifetime capital gains exemption on the sale of Qualified Small Business Corporation (QSBC) shares. The lifetime capital gains exemption is an economic incentive to help raise the level of investment in small businesses. If an individual sells Qualified Small Business Corporation shares for a profit, the first $750,000 of the capital gain can be received tax-free. This is a lifetime exemption, meaning an individual can only shelter up to a maximum of $750,000. There are specific conditions that must be met for shares of a corporation to be classified as QSBC shares. It is important to undertake some advance planning to ensure eligibility for the exemption. To qualify for the exemption, you must meet two tests.

    The first test is that your corporation must be a "small business corporation" at the time of sale. That means that it must be a Canadian-Controlled Private Corporation (CCPC) and all or substantially all of its assets must be used in an active business carried on primarily in Canada. The Canada Revenue Agency (CRA) interprets "all or substantially all" to mean that assets representing at least 90% of the fair market value of all corporate assets must be used for active business purposes.

    The other test you must meet to qualify for the exemption is that more than 50% of the fair market value of the corporation's assets must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale, and the shares must not have been owned by anyone other than you or someone related to you during the 24-month period immediately before the sale. If both tests are satisfied, you may be able to claim the exemption on your tax return in the year of the sale.

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