Do you perform research during your day-to-day activities? Are you looking to develop new procedures or new medical devices that will improve human lifestyles? If you answered yes to either of these, you may qualify for the very lucrative Scientific Research and Experimental Development (“SR&ED”) tax credit. I won’t go into great detail about the complete SR&ED process here as I would be writing a novel, not a blog at that point, but I will highlight the benefits of SR&ED and provide some suggestions of the types of projects you may be undertaking that qualify for SR&ED.
The benefit of SR&ED
Beyond the obvious benefits of your R&D work (improved pharmaceuticals, faster and safer medical procedures, increased longevity), your R&D work could qualify for SR&ED. If this is true and you perform the R&D through your Medical Professional Corporations (MPC) or another Corporation (which you should consider and is discussed below), your corporation could qualify for up to 65% in tax credits on qualifying salaries and wages paid for SR&ED purposes in Ontario. If you are outside of Ontario, you can qualify for these credits as well, but the rates will vary. In addition to qualifying for these credits, a portion of those available (approximately 60% in Ontario) may be refundable to the corporation in a year where the corporation has no tax balance owing.
As you may expect, there are very specific rules with respect to qualifying activities for SR&ED given the lucrative nature of the tax credit and potential refund available. This blog doesn’t go into detail on the overall specifics, but these details can be found here . The key to qualifying SR&ED is the advancement of knowledge in the field of science or technology. If you are operating an MPC, this is likely in the field of medical science (devices) or medical research (new compounds, materials, procedures or pharmaceuticals).
Now that you know the benefits of SR&ED, you must consider whether you are currently or want to start pursuing SR&ED in your MPC, or through a separate corporation. A couple of common areas where physicians perform SR&ED are:
- Developing a new medical device – As a physician at the face of medical services, you may recognize the need for an improvement in a medical device including the equipment to perform your duties (scalpels, sutures), measurement devices (EKG, portable ultrasound devices) or systems (computer guided surgical systems);
- Developing a new treatment – Consider targeted cancer treatments versus the traditional non-targeted chemotherapy or the new EKG-based headsets and gamification; and
- Pharmaceuticals – new chemical compounds are created everyday. The formulation, development and testing of these compounds may be SR&ED.
Benefits of a separate corporation
While you can perform SR&ED within your MPC, you may find it beneficial to incorporate a separate company for this development. The benefits include access to additional funding, limiting potential risk and sharing the benefits of ownership with family members.
Additional funding – If you are developing new technology that requires significant capital expenditures or testing, you may need to access additional funding. This type of funding is often raised from angel investors, venture capitalists or initial public offerings. In each of these situations you will want the ability to create appropriate ownership structures, often with non-medical, non-family members – structures that are not available to MPCs.
Limiting potential risk – as you pursue your research with potential testing of devices or pharmaceuticals there is a risk that issues and liability may arise. If these liabilities were to arise in your MPC, all of the hard work and effort you have put into your MPC would be at risk. Having a separate company can better protect your MPC assets from these potential risks and liabilities.
Sharing in the benefits – perhaps the best reason to perform your R&D work in a separate company is the ability to create a tax-efficient corporate structure. As you are aware, the ownership of MPC’s by holding companies, family trusts and even family members are limited by the MPC rules. These limitations don’t apply to a non-MPC that is focused on R&D, allowing you to organize your affairs in a tax-favourable manor. This may allow for access to the capital gains exemption by multiple family members, sheltering approximately $1 million in capital gains from tax for each family member that qualifies.
As you can see, performing R&D within your corporation or another corporation can be very beneficial to you, your family and others. If you are performing R&D in your MPC currently, you should consider a separate corporation to take advantage of the benefits discussed above. If you have any questions about SR&ED, MPCs or the benefits of using a separate corporation, please reach out to myself or your Welch advisor for guidance.
ESTIMATE YOUR TAX CREDITS & REFUND
Scientific Research and Experimental Development (SR&ED)
Use Welch LLP’s SR&ED calculator to determine your potential SR&ED tax credit. Your business and bottom line will thank you.
