3 Government Wage Subsidy Programs for Startups and Small Businesses

Budget limitations and inexperience can make hiring new employees a difficult decision for small business owners. Luckily, If you are a startup or a small business in Canada, there are numerous programs that can help you get up and running.  Some programs provide help with your cash flow in the form of financing, grants, subsidies and tax credits while others provide resources such as training, mentoring and coaching.  Many small businesses particularly when they are in the startup stage should take the time to research these programs and send applications to the ones that might be applicable.  Below are a list of three popular programs that are worth exploring further:

Note that the programs listed below are independent of COVID.  For a list of COVID related wage subsidies and tax credits, please see the Government of Canada website

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Scientific Research and Experimental Development Tax Incentive Program (SR&ED federal):

• The SR&ED Program (SHRED as some people like to call it) is perhaps the largest and most well know tax credit available to all Canadian businesses at the Federal level.   It provides a tax refund/credit of up to 35% on R&D expenses including wages, salaries, machinery, equipment for companies that engage in basic research (usually universities and research centres) or more advanced research towards a specific application. 

• The amount of the credit for a Canadian-controlled private corporation (CCPC) is 35% up to $3 million of expenditures, which is refundable rather than simply a reduction of corporate taxes payable.  If your R&D expenses exceed $3 million then you may qualify for a non refundable tax credit (i.e. reduction of corporate tax payable) of 15% although a portion of this may also be refundable given certain eligibility requirements.

• The non refundable tax credits can be carried back 3 years or carried forward up to 20 years.  In other words, if your company paid taxes in any of the three previous years you can apply for a refund against those taxes or apply them against taxes payable in future years.

• The due date for filing an SRED claim is 18 months after the year end of business

• Corporations that are not CCPC, individuals, trusts and partnerships can also claim SRED tax credits, usually at a reduced rate of 15%. There are specific requirements and mechanisms to do this, an overview of which can be found here

• Expenses that qualify for SRED are:

  • Salaries paid to employees can be claimed at 100%.   If an employee works on the project for a portion of their time, then their salaries are to be claimed based on the time spent i.e. on a pro rata basis.  It is important to keep detailed time sheet records of the work performed and the number of hours spent to backup the claim.

  • Payments to independent contractors can be claimed at 80% as long as it can be demonstrated that the work was performed in Canada.  It should be noted that if a payment is made to a contractor in advance this cannot be claimed until the work is performed.   The business who is claiming the SRED should maintain ownership of the work performed

  • Materials that directly relate to the research and development work including raw materials, substances and other items used for the product or process

  • Overhead that are either directly attributable to the SRED. Alternatively the Proxy method can be used whereby a fixed amount of overhead is attributed to the claim.

  • Third party payments which are essentially payments made for SRED carried on in Canada the results of which can be used by the entity claiming the SRED.

• If you are not sure if your claim qualifies, you can submit a Pre Claim Consultation request. Alternatively, you can find an SRED consultant who can help you determine if you are eligible. The pre claim consultation applies to a maximum of 3 projects per year and must be filed within after the year end of your business. There is also a self assessment tool which can help provide further insights on the eligibility of your claim

Investissement Quebec Development of E-business (Quebec)

• This tax credit is aimed towards businesses that carry out” innovative, high-value-added activities in the IT sector”  to obtain a tax credit of an annual maximum of $25,000 per eligible employee.

• The tax credit is equal to 30% (24% refundable and 6% non-refundable) of the eligible salaries paid by the corporation to eligible employees.  Maximum salary upon which this is payable is $83,333

• Eligibility for the Quebec E-Business tax credit is based on the following criteria: if the activities it carries out are

• The business activity is primarily in the fields of information system design or software publishing and

• The business activities are carried out in an establishment in Québec.

• At least 75% of its activities are in the IT sector which include computer ,peripheral equipment and  computer software manufacturing, wholesale and retail AND

• Of the 75% of activities in the IT sector, at least 50% relate to:

  • Computer systems design and related services

  • Video game design and development services

  • Software publishers

  • Video game publishers

• The applications above must be sold to arms length (unrelated) parties who reside outside Quebec

• Generally the company must have at least 6 full time employees although there are exceptions for startups

• Eligible Employees must hold a full-time job and devote at least 75% of his or her time to carrying out, supervising or directly supporting work relating to the execution of an eligible activity.

• Eligible Activities  include IT consulting services, information systems (eg, distribution packages, software and computer programs), technology infrastructure (eg, technology architecture upgrading and integration of hardware and software components), Design and development of e-commerce solutions, Development of security and identification services (eg electronic imaging, artificial intelligence and interface)

• Excluded Activities (activities that are NOT eligible ) include Operation of an e-business solution (eg, processing of electronic transactions over a transactional website), Management or operation of information systems, applications or infrastructures arising frome-commerce activities, Operation of a customer relations centre, Hardware installation and training activities. Activities not related to e-business, activities related to a marketing information system and designed to increase a corporation’s visibility and promote its goods and services to current or potential customers

• To be entitled to the tax credit, your corporation must obtain a corporation certificate and an employee certificate from Investissement Québec every year.

Further details on applying for the Quebec E-Business tax credit can be found here

Apprenticeship Job Creation Tax Credit (Federal)

• If you hire an apprentice, you could get a tax credit equal to 10% of that person's salary. The maximum credit is $2,000 per year per eligible apprentice. 

• You need to hire an apprentice who is:

  • In the first 2 years of an apprenticeship program registered with the government

  • In a trade like those listed under the Red Seal Trades which include mechanics, bricklayers, carpenters, cooks, hairstylists, machinists, painters, roofers, welders and many more

  • Working towards getting a certificate or licence in that trade

• You would apply for the apprenticeship tax  credit on either your personal or corporate tax return depending on whether you are unincorporated or incorporated:

• If you are unincorporated eg. a sole proprietorship, you would complete the section of form T2038 which relates to the apprenticeships job creation tax credit

• If you are a corporation, you would complete Part 21 (apprenticeship job creation) on chedule 31

• This is a non refundable tax credit which means that it can only be used to reduce income taxes or corporate taxes payable.  The credit can be carried back against taxes payable from the previous 3 years or carry it forward 20 years.

• In order to claim the credit the apprentice must be registered with a federal, provincial, or territorial government under an apprenticeship program designed to certify or license individuals in the trade.

A comprehensive list of both  Federal and Provincial programs for all types of programs are available at the Government of Canada website .  It is great resource for startups and small business owners who have some time on their hands and require funding or resources to assist them in making their business successful.

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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