If a tree falls in a forest and no one is around to hear it, does it still generate cash?
By Sean Verret EY senior manager
By Sean Verret EY senior manager
Feb. 20, 2017 – Whether it’s the softwood lumber dispute, the pine beetle epidemic, aging capital infrastructure or any other challenge in forestry, there are always costs that can significantly cut into profits. Because of that, the industry is constantly looking for new ways to maximize cash flow. One way for forestry companies to generate valuable cash, though, is through refundable and non-refundable tax credits.
Actively engaging in experimental trials to create new and improved products and processes is good for business — every business already knows that. But it’s also key to maximize the credits available through Canada Revenue Agency’s (CRA) Scientific Research & Experimental Development (SR&ED) program.
It doesn’t have to be a complex experiment — many simple trials can be eligible for tax credits, too. One of the important things to have at the ready when applying for credits like SR&ED is properly documented trials and outcomes. That means identifying the potential technical challenges you’re facing, before trying to overcome them. By educating engineers, scientists, and technologists on the proper trial and documentation processes, everyone can contribute to better focused innovation, while at the same time ensuring the company can capitalize on the tax credits available.
Here’s an example: imagine your company is thinking about experimenting with an alternative bleaching strategy, but isn’t sure how to meet brightness specifications or how that could affect the other properties of the final pulp. While laboratory indications look good, the only way to determine if the idea works in a real world environment is to try it on the shop floor. So, you set up a trial, modify your process for the new bleaching regime, and set an experimental starting dosage. Next, as normal, you run the resulting pulp through the rest of your process and test the output to see what impact the change has on your end product. Of course this experiment could help improve your business process and/or product, but with a well-documented experiment, you could also reap the benefits of the SR&ED tax credits.
So how would something like this impact your company? The Federal Investment tax credits (ITC) for this type of work would be 15 per cent of your claimed expenditures – with a 35 per cent refundable credit if you’re a qualified Canadian-controlled private corporation. Plus, some provinces have fully refundable tax credits that vary between 5 and 20 per cent, that can be stacked on top of the Federal credit. The non-refundable ITCs can be carried back up to three years and forward up to 20 years. So, even if your company is in a loss position, if you were in a taxable position in the past and can apply the credits back three years, it generates cash immediately.
Maximizing cash flow is the key to any successful business – and critical in order to pay employees and suppliers, and please shareholders. The SR&ED program is a valuable tool that can help you offset the costs of innovation that can help make your business viable in the longer term, while at the same time help you to stay in the black in the shorter term.