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      Is Your Business SR&ED Eligible?

      Companies need funding to expand and invest in new projects. Depending on the stage of the business, there are several funding options, but the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program could be considered the most rewarding. It's a program that supports Canadian companies conducting research and development (R&D) activities focused on advances in science and technology. The question most entrepreneurs ask, and the one that probably led you here, is how to assess your SR&ED eligibility?.

      In short, companies at all stages - startup, growth, and maturity - might be eligible for the SR&ED tax incentive program. To that end, they must conduct admissible R&D activities in Canada, advance scientific knowledge, and have the records to prove it.

      You'll know exactly if your business is SR&ED eligible by the time you finish reading this article.

      Table of Contents

      What is the SR&ED Program?

      How Does it Work?

      What are the benefits of SR&ED?

      What Companies are Eligible?

      What Work Categories are Eligible?

      What Expenditures Can you Claim?

      What Work Categories are NOT Admissible?

      Eligibility Criteria

      Practical Steps for Submitting a Successful Claim

      Increasing your Success Chances

      Conclusion

      What is the SR&ED Program?

      The SR&ED Tax Incentive Program is Canada's largest source of governmental financial funding for R&D. In 2021, the program provided over $4 billion in tax incentives to more than 19,700 claimants. This means a 40% increase versus 2020’s ITCs (Input Tax Credits). Moreover, 75% of these claimants are small businesses, which provides entrepreneurs with a reliable source to invest in innovation.

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      SR&ED credits come in the form of refundable and non-refundable tax credits on expenditures for scientific R&D. Canadian companies use earned amounts for various expenditures, which range from expanding ongoing research and development projects to inventory and operating expenses.

      How Does it Work?

      The Canada Revenue Agency (CRA) is the authority responsible for reviewing and accepting SR&ED applications. Generally, the process is as follows:

      • Businesses have 18 months after the end of the tax year to submit SR&ED applications.
      • The CRA processes applications within 60 calendar days of submission.
      • Within those 60 days, the CRA can decide whether to Accept the Application as Filed (AAF) or review it further.
      • If the claim is selected for review, CRA will strive to complete that review within 180 calendar days of receipt of the complete claim.

      The CRA is committed to meeting these deadlines 90% of the time, according to its service standards.

      What are the benefits of SR&ED?

      The so-called "cornerstone of Canadian innovation" has been a fulfilling alternative for thousands of companies since its inception in 1944.

      First, SR&ED incentives are a non-dilutive source of funding for businesses. In other words, you gain access to funding without having to incur expensive debt or sell equity.

      Because the nature of your research and development efforts is more important than the success or failure of the final product, innovators are encouraged to test new ideas. Without such a program, many processes, methods, and advancements would never be explored.

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      Also, the SR&ED program allows businesses to reduce their tax liability in current or future years. For example, a company can:

      • Use ITCs to reduce the tax payable for the year.
      • Apply for a refund if it has an excess of ITCs.
      • Carry unused ITCs back 3 years or forward 20 years and offset them against the tax liability for other years.

      Finally, the SR&ED claims grow and scale with the business. Unlike other government tax programs, you can apply for SR&ED every year that eligible work takes place. Then, use the funds to expand operations, grow your team and build more products.

      What Companies are Eligible?

      SR&ED Investment Tax Credits are available to all companies operating in Canada if they engage in eligible R&D activities. These activities must be associated with the respective business and involve costs. In addition, funds allocated by the program to R&D applicants must be spent in Canada. These companies include:

      • Canadian Controlled Private Corporations (CCPCs)
      • Foreign and/or Publicly Owned Corporations (Non-CCPCs)
      • Individual Proprietorships
      • Partnerships
      • Trusts

       

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      Some of the industries that benefit from the SR&ED program are (but are not limited to):

      • Information Technology
      • Manufacturing & Engineering
      • Agriculture and Agri-food
      • Biotech, Life Sciences, and Medical Technology
      • Cannabis
      • Clean and Sustainable Tech
      • Oil & Gas
      • Energy & Mining
      • Media & Communication

      What Work Categories are Eligible?

      The primary goal of the SR&ED program is to support companies that invest in advancement and innovation in science and technology. Your SR&ED work must advance the technological or scientific state of the art to be eligible.

      Based on these requirements, the following work may be credited to SR&ED:

      • Basic research: scientific knowledge without practical application. This work is usually conducted by universities or research institutes and published in peer-reviewed journals. In other words: Science for science's sake.
      • Applied research: it's the opposite of basic research. This type of work is done to extend scientific knowledge with an eye toward a specific practical application. For example, you're researching the properties of semiconductor materials to develop a semiconductor amplifier.
      • Experimental Research: any work done to help a company develop new or improve an existing process, material, device, or product. Approximately 95% of SR&ED applications fall into this category.

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      You can also claim any activity that directly supports the categories above. This support work includes:

      • Engineering
      • Operations Research
      • Computer Programming
      • Data Collection
      • Math Analysis
      • Design
      • Testing
      • Psychological Research

      What Expenditures Can you Claim?

      The amount of SR&ED credits you can claim varies by province. But, in short, these are the three categories that are eligible for reimbursable expenses and the maximum return rates for CCPCs:

      • Salaries and wages: 69%
      • Subcontracting fees: 36%
      • Materials consumed or transformed: 42%
      • Refundable ITCs: YES*

      *Note: Pre-revenue or not yet profitable businesses are eligible for refundable tax credits.

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      What Work Categories are NOT Admissible?

      It should be noted that not all R&D work performed is eligible for SR&ED credit. Certain activities are considered ineligible and are therefore excluded from credit. Some examples are:

      • Research in the humanities and social sciences.
      • Routine testing of processes, products, or devices.
      • Exploring or producing minerals, petroleum, or natural gas.
      • Market research or sales promotion.
      • Routine data collection.
      • Style changes.
      • Commercial production of a new or improved product, device, or material.
      • Commercial use of a new or improved process.

      Eligibility Criteria

      In addition to the work categories you now know, there are three criteria you must meet to qualify for SR&ED funding:

      1. Technological uncertainty: You must demonstrate that you faced technical challenges and uncertainties during your research process. In other words, it was impossible to predict the outcome of your work without experimentation.
      2. Systematic investigation or search: You must demonstrate the various iterations or phases carried out to overcome these challenges. The work claimed has to go beyond the existing knowledge base of the team and what already exists in the public domain.
      3. Technological Progress: As a result of the experimentations, your SR&ED project must achieve technological advancement in a given field of science.

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      Practical Steps for Submitting a Successful Claim

      1. Proper documentation

      You need to set up a system for storing and tracking information for your R&D-related work. This step is essential for companies that determine eligible expenses using the traditional method instead of the proxy method. This function is vital in substantiating the amount claimed.

      Proper documentation includes, but is not limited to:

      • Automated time tracking
      • Project tracking tools
      • Notebooks
      • Whiteboard pictures.
      • Meeting minutes.
      • Emails.

      2. Determine the eligibility criteria

      The program focuses on how you attempted to overcome a limitation in the current knowledge base. You must identify the technological uncertainty you encountered and detail the systematic investigation conducted to resolve that uncertainty. Then you must clearly state what progress you've made with this investigation.

      3. Accurate financial analysis

      Collect all associated SR&ED expenditures and financials to calculate the final claim amounts accurately. It's also important to consider any other grants or government subsidies that may impact the amounts claimed.

      Increasing your Success Chances

      Although the SR&ED tax credit is very rewarding, its application process can be complicated. Among the SR&ED-related mistakes companies make, applying on their own is one of the most common.

      At Flow Ventures, we have decades of experience in the industry to provide you with a superior SR&ED claim experience. We do the heavy lifting for you, saving you time, money, and valuable human capital. Our outstanding SR&ED consulting services help you minimize risk and maximize refunds.

      Our SR&ED service feature includes:

      • SR&ED Claim preparation
      • SR&ED Claim Peer Review
      • CRA Audit Defense
      • Fast and Optimized SR&ED Application Submission

      Conclusion

      There's no doubt that the SR&ED program is an instrumental initiative for various companies. However, the processes and criteria can be challenging. Let's get in touch to discuss your specific case and support your business growth.

       

       Written by: 

      Asiel Hanna

      Director of Technical Services

      Flow Ventures

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      Find Out How Much Money You Can Recover From The CRA

      Schedule a conversation with one of our SR&ED tax credit experts.

      Fill out the form to schedule a conversation, where we can help identify:

      • What projects qualify and which R&D expenditures are eligible
      • An estimate of the total return you can expect
      • How to maximize the size of a claim & and to optimize for the success of that claim
      • Potential eligibility for additional Government funding programs
      • If you are already claiming, we will analyze your past claims to determine if anything was missed