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SR&ED for Manufacturers

What is SR&ED?

Scientific Research & Experimental Development (SR&ED) is a Canadian government tax credit program aimed at encouraging businesses of all sizes to conduct research and development (R&D) to develop new — or improve existing — methods, processes, services and products.

Any business that conducts R&D in any field is eligible for these tax credits, providing its activities meet the standards that have been specified. If a manufacturing business already performs activities that qualify for an SR&ED tax credit but does not submit claims for reimbursement of the costs, it is failing to leverage a valuable potential source of capital.

Manufacturers need to look at making innovation more affordable by investigating how they can qualify for R&D refunds that will help cover their costs of materials and wages, as well as other related expenses.

Activities in the Manufacturing Industry that Qualify

The SR&ED tax credit’s eligibility criteria focus on the R&D activities a company undertakes and how these are conducted and are the same across all industry sectors. The R&D team must employ a systematic approach in identifying a need and developing a proposed solution. The need identified must reflect a valid technological or scientific uncertainty that can’t be solved by existing products, processes, or materials.

It should be noted that an SR&ED project succeeding is not an eligibility requirement. The Canada Revenue Agency (CRA) does not simply reward successful advancements, but its aim is rather to encourage R&D work regardless of the outcome’s success or commercial viability. Their goal is therefore to support technological advancement by Canadian companies in Canada to create a reputation as a major innovator globally.

Several activities in manufacturing may qualify for an SR&ED tax credit including:

  • Combine materials in innovative and new ways

  • Develop new applications for components that were not originally designed to work together

  • Adjust and/or reformat products so that they achieve a specific objective not previously produced

  • Establish new product finishing processes and procedures that are seen as a technological advancement

  • Reformulate equipment to achieve new objectives

An R&D tax credit may also be awarded for developing a new process. If a new solution is for example created to mitigate a safety challenge or hazard, those activities may meet the requirements of the SR&ED program.

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R&D Expenses in the Manufacturing Industry that Qualify

Maintaining a competitive edge in this challenging landscape requires constant innovation. The innovation required to stay a step ahead of your competitors is made easier with refunds of as much as 69% of eligible SR&ED expenditure.

Within the R&D activities that are eligible for an SR&ED tax credit, there are specific expenses that may be claimed. Submitting non-qualifying expenses and poorly documented expenditures will result in a claim being denied, or a refund being delayed.

The expenses in the manufacturing sector that qualify for an SR&ED tax credit include the following:

  • Materials that are expended or altered during eligible activities

  • Prototypes that were developed using these materials

  • Employee wages paid to undertake eligible R&D activities

  • Mathematical analysis

  • Engineering and design

  • Data collection

  • Computer programming

  • Psychological research

Expenses relating to eligible work done under contract by a third party may also be claimed, although only 80% of those expenses are reimbursed.

To ensure that the full value of an SR&ED claim is received, detailed records of methods used, work performed, and expenses incurred should always be kept.

Activities in the Manufacturing Industry that Don’t Qualify

Although there is a good probability that R&D activities may qualify for an SR&ED tax credit, there are some R&D activities that won’t qualify.

The following activities don’t qualify for an SR&ED tax credit, not only in the manufacturing sector but in any industry:

  • Commercial production and development of improved or new products, or the use of such products

  • Normal testing of products, processes, devices, and materials

  • Quality control activities

SR&ED tax credits are also not available for activities relating to the production of, prospecting, and/or drilling for natural gas, petroleum, or minerals. R&D work may however qualify if a company supports the exploitation and/or discovery of natural resources, or manufactures equipment for those practices.


 Written by: 

Peter Bailey 

Partner, Flow Ventures 

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Find Out How Much Money You Can Recover From The CRA

Book a free consultation 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

 

CLIENT CASE STUDIES

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Warren Wilansky
CEO, Plank
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  Montréal, Québec
Learn how we helped an award-winning digital design studio utilize the SR&ED cycle to grow their team from 5 to over 24 employees

"For over 17 years we have relied on Flow’s expertise in government funding applications, strategies and best practices. We have always been extremely happy with the results of their diligent work."


17 Years

Of SR&ED claims filed

380%

Growth in employee count

100%

Claims accepted as filed