You’re an inventor and entrepreneur developing a new solution and living off KD and Timmy’s. In Canada this is typical of many new start-ups. Let’s assume you’re a Canadian Controlled Private Corporation (CCPC). There may be a way to add funding for your company even though you may not have enough money to pay yourself.
R&D is subsidized in Canada through the SR&ED program. More info is available here www.cra-arc.gc.ca/sred. If you undertake R&D, chances are good that you qualify for the SR&ED program.
The basic process is simple: Declare a salary, make a SR&ED claim, file your personal tax, and you will be ahead of where you would have been if you declared no salary. Let’s use an example of an inventor who spends a year developing a new solution. His fair market salary is $70,000 and he lives in Ontario in 2009.
- Assumed salary applicable to R&D: 100%
- Fair market salary declared on T4: $70,000
- Potential SR&ED claim: $47,950
- Personal tax payable: $15,820
If you did not draw a salary, the company pays you $0, you owe $0 in tax and you cannot make a SR&ED claim. If your company issues a T4 for $70,000, the company will have a liability of $70,000 in salary payable to you, be eligible to receive up to $47,950 in SR&ED funding and you have a personal tax liability of $15,820. The net result is that you and your company will be ahead by $32,130 in cash. If you SR&ED claim is successful, you can now pay yourself $32,130 and the company would have a salary payable liability of $37,870. Assuming the company is making a loss after the SR&ED is taken into account, there is no tax liability for the company.
So remember, even if you don’t have money to pay salaries, in most cases making a SR&ED claim will put you ahead of the game.