US businesses that maintain a Canadian tech office or sell products or services in Canada can qualify for significant tax advantages offered by the Canadian Scientific Research and Experimental Development (SR&ED) tax incentive program.
These tax credits encourage foreign corporations to expand their reach into the Canadian market provided they also undertake software development and research that is focused on crafting new technologies (rather than maintaining existing systems).
So if you’re a US company and you have tech talent in the US, utilizing Canadian immigration and building your development team in Canada can actually be a smart financial strategy.
This article is going to discuss how establishing a tech office in Canada not only opens up the gateway to SR&ED tax credits but also provides an opportunity to tap into the global talent pool by hiring foreign nationals often more easily than in the US. Let’s dive in.
What is the SR&ED program?
The SR&ED program came into existence as part of the Canadian government’s strategy to foster innovation within the country, incentivizing companies to work on tech development projects and research. The program has, over time, evolved into one of the largest sources of federal government support designed to encourage businesses of all sizes and from all sectors to conduct research and development in Canada.
It’s an attractive scheme as it allows companies to lessen their tax obligations in the present year or a forthcoming one. The tax incentives come in three forms: a deduction from income tax, an Investment Tax Credit (ITC), and in specific situations, a tax refund.
What makes a company eligible to claim the credit?
A company doesn’t necessarily have to be Canadian-based to be eligible for the SR&ED tax program. Foreign companies can qualify for these tax credits if they have a Canadian office engaged in specific research and development projects, sell their product or service in the Canadian market, and pay Canadian taxes.
What work is eligible for the SR&ED program?
The type of work that qualifies for this incentive program must revolve around software development that pushes the boundaries of existing technology. The developed software must also be sold within the Canadian market. This tax incentive program focuses on rewarding efforts made to overcome technological obstacles and uncertainties and create and improve products and processes.
Some examples of eligible research and development include:
- Fundamental Research: Tasks conducted with the intent of broadening the horizons of scientific understanding without an immediate practical application
- Practical Research: Efforts aimed at expanding scientific knowledge, tailored towards a particular practical application.
- Innovative Development: Actions pursued with the goal of fostering technological progression, intended to generate new or enhance existing materials, gadgets, products, or procedures
- Auxiliary Tasks: Comprising engineering, design, operational studies, mathematical examinations, coding, data accumulation, testing, and research in psychology.
By using this program strategically, foreign companies can substantially benefit from tax incentives while further strengthening their global presence through a Canadian base.
Opening or leveraging an existing Canadian tech subsidiary can be a strategic approach for US companies
In the face of challenges associated with the H-1B visa, many US companies are turning to Canada as a viable alternative for recruiting top tech talent. However, it is often the case that these firms employ Canadian tech professionals just to bolster their existing US-based teams.
What many companies may not realize is the immense potential that lies in venturing into new technology development within Canada itself, including substantial tax credits — this also applies to foreign-based entities if they pay Canadian taxes.
One of the simplest solutions for US companies looking to scale up and navigate the complexities of managing Canadian operations is to work with a professional employer organization (PEO) that understands Canadian tax laws. Partnering with a PEO allows companies to hand over the legal, payroll, HR, immigration, hiring, and other aspects of Canadian employment to experts, while the responsibilities, benefits and pay of those employees remain with the US company.
Your Canadian office can focus on new aspects of tech development and research while the additional tasks related to supporting that Canadian office are taken care of by the PEO.
Syndesus is a Canadian PEO that can help manage your Canadian entity and expand it into a tech hub
The dynamic landscape of international business and tax needs nuanced, expert solutions. Leave the administrative aspects of opening a Canadian tech office to Syndesus, a Canadian PEO with extensive expertise in managing operations for US clients. We can manage everything from HR and immigration to tax and legal.
So whether you’re looking to establish a new legal entity or you want to develop your existing Canadian entity into a tech hub, we’ve got you covered.
We ensure the smooth handling of administrative procedures allowing you to concentrate on what matters most — growing your talent pool, advancing your tech development, and driving your company toward further success in the Canadian market.
Reach out to us to learn more about how we can help you!
