SR&ED, or the Scientific Research and Experimental Development program, is a Canadian tax incentive program developed to encourage businesses of all sizes and in all sectors to conduct research and development in Canada. The program allows businesses to reduce tax liability in the current year or a future year. These tax incentives come in three forms: an income tax deduction, an investment tax credit (ITC), and, in certain circumstances, a refund.
Every year approximately 22,000 claims are processed totalling over $3.5Billion in investment tax credits.
The Scientific Research and Experimental Development (SR&ED) tax credit is the single largest source of Canadian federal government financial support with the goal of incentivizing business-led research and development projects. This article will dive into how the program came to be, who is eligible to utilize this program, and how one can benefit from it to support your R&D activities.
What is Research & Development Defined As?
The Frascati Manual has provided internationally accepted definitions of research and development to more accurately compare R&D efforts made in various countries. The co-ordinated efforts among and beyond the Organisation for Economic Co-operation and Development (OECD) countries to define and implement the recommendations in this manual have resulted in a valuable source of evidence for science, research, and economic policy makers. The Frascati Manual defines research and development as the “creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge.”
How Did the SR&ED Program Start?
Since 1985, the Canadian government has used the Income Tax Act to stimulate research and development initiatives through the SR&ED incentive program, basing the definition of research and development on the Frascati definition. The Canada Revenue Agency (CRA) is responsible for delivering the program; however, the Department of Finance makes the laws.
The Income Tax Act defines SR&ED as “a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…to advance scientific knowledge (basic or applied research) or to achieve technological advancement (experimental development) for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto…”
The SR&ED incentives program is specific to Canadian taxpayers / businesses; however, most OECD countries have a similar type of research and development incentive program. Canada’s is among the richest of these programs globally.
Who Can Claim SR&ED Tax Credits?
Companies that conduct business in Canada can claim SR&ED if the work performed meets the eligibility requirements, the work is related to their business, and expenditures are incurred. These include Canadian-controlled private corporations (CCPC), public corporations, partnerships and other corporations. Learn more about the businesses and organizations eligible for SR&ED tax credits.
What Activities are Eligible for SR&ED Tax Credits?
Work that may qualify for SR&ED includes:
- Basic research: work undertaken for the advancement of scientific knowledge without a specific practical application; and
- Applied research: work undertaken for the advancement of scientific knowledge with a specific practical application; and
- Experimental development: work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products, or processes, including incremental improvements; or
- Support work: engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research.
In determining eligibility, you need to address why the work was undertaken (for the purpose of achieving a scientific or technological advancement) and how the work was conducted (systematic investigation).
What are the timelines for filing SR&ED claims?
Your SR&ED claim must be filed by the reporting deadline; 18 months for corporations. Upon funding approval, your SR&ED tax credits may be refundable in cash, used to offset taxes payable, or otherwise carried forward for up to 20 years.
Apply for SR&ED Funding
The Scientific Research and Experimental Development (SR&ED) has a reporting deadline of 18 months from the end of the tax year in which the qualifying expenses were incurred. For application assistance, please book a meeting with our SR&ED consultant team or give us a call at 1-888-599-3111 to determine whether your business is eligible for benefitting through the Scientific Research and Experimental Development SR&ED tax credit.
If your business is performing research & development in Canada, you may be eligible to receive tax credits covering up to 69% of labour and overhead costs, 36% of contractor costs, and 45% of material costs through the Scientific Research and Experimental Development (SR&ED) program. We’ve put together a free SR&ED 101 guide PDF that you can download to learn more about how you lower your R&D project costs
Author: Kathryn Neale
Kathryn Neale obtained her Honours Bachelor of Applied Science (B.A. Sc.) and Masters of Applied Science (M.A. Sc.) in Chemical Engineering from the University of Waterloo. Kathryn began as a SR&ED consultant and has been involved applied her skills towards preparing SR&ED claims in a wide range of industries including automotive manufacturing, aerospace, industrial coatings, meat processing, brewing, machining, automation, solar and metal fabrications