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Who can claim SR&ED tax credits?

Some people mistakenly believe that to qualify for a Scientific Research and Experimental Development (SR&ED) claim, they need a fully equipped laboratory or be a rocket scientist. This is fortunately not the case.

The SR&ED tax incentive program is aimed at encouraging businesses of any size in Canada, including small businesses, to do innovation and research. Any business that performs qualifying work may be able to claim SR&ED tax credits.

Technological Uncertainty and Scientific Investigation

The CRA (Canada Revenue Agency) specifies that any work that addresses technological or scientific uncertainty, improves the understanding of technologies or scientific relations, and includes competent personnel doing a systematic investigation is eligible for SR&ED claims.

This means that any R&D (research and development) or work done for technological advancement or to advance scientific knowledge will qualify as SR&ED work. This work may include things like developing a new manufacturing method or product or investing in production processes that are environmentally friendly, as long as the intention is to create new knowledge (and competitive advantage) in the business.

Company Types That May Apply For SR&ED

If you have a business that performs this kind of work in Canada, you may be eligible for a credit on expenditures that qualify and are related to the work. These expenditures include things like materials purchased, salaries and wages, overhead costs, third-party payments (i.e. universities), and SR&ED contracts. Tax credits from SR&ED projects are used to reduce the amount of income taxes payable.

CCPC (Canadian Controlled Private Corporations)

Some of the largest SR&ED tax benefit claims are made to corporations that are seen to be Canadian Controlled Private Corporations (CCPCs). Corporations are seen as CCPCs if they are incorporated in Canada, reside in Canada, and are privately owned. The CRA also specifies that a CCPC may not be controlled by a combination of corporations with shares listed on a stock exchange, public corporations, or non-residents.

Corporations that are defined as CCPCs can normally earn 35% in SR&ED investment tax credits which may be applied up to a maximum of the first $3M of qualifying expenditures. An additional 15% investment tax credit may be earned on expenditures of more than the first $3M.

Other corporations

Businesses that aren’t considered to be CCPCs due to any of the criteria described above may still qualify for SR&ED tax credits. The CRA’s definition of “other private corporations” are corporations that are not public and are headquartered in Canada. The CRA also specifies that an “other private corporation” may not be controlled by a combination of federal Crown corporations or public corporations.

If a business is seen as an “other private corporation,” it can normally qualify for a 15% investment tax credit of qualified expenditures for SR&ED work that is performed in Canada.

Trusts and individuals

Trusts and individuals that undertake SR&ED work and have expenditures that qualify, can earn a 15% refundable investment tax credit. The credit must however first be applied to tax payable in the current tax year before a refund will be issued. Thereafter, 40% of the residual credit may be refunded.

Partnerships

As a partnership isn’t a taxpayer, it can’t earn investment tax credits. If a partnership in Canada however does qualifying SR&ED work, a tax credit of 15% of qualified expenditures may be earned.

The tax credit is calculated at the partnership level and allocated to the individual eligible members. The allocation of credit is determined by each individual’s share in the partnership which had been agreed upon by the partners.

 


 Written by: 

Peter Bailey 

Partner, Flow Ventures 

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  • 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