Scientific Research & Experimental Development (SR&ED) is a Canadian government tax credit program aimed at encouraging SMEs, startups, corporations, partnerships, and individuals to conduct R&D that leads to new, improved, or technologically advanced products, processes, devices, and materials. SR&ED credits come in the form of refundable and non-refundable tax credits on expenditures for scientific R&D.
Canada’s SR&ED program is one of the world’s most generous R&D tax incentive programs. Every year, over 20,000 claimants receive in excess of CDN $3 Billion from the program.
- A business can deduct the SR&ED expenditures to reduce their tax liability in the current year or carry these expenditures forward indefinitely to reduce their tax liability in future years.
- A business can receive a SR&ED investment tax credit that may be refundable and/or used to reduce taxes payable.
Canadian taxpayers can recover up to 70% of their eligible SR&ED-related expenditure depending on their:
- Province or Territory in Canada
- Ownership structure (Canadian owned vs. foreign, private vs. public)
- Taxable income (in the prior fiscal year)
- Size and scope of expenditure
Yes. Most Canadian provinces and territories offer complementary R&D tax incentives. The specific percentages of expenditures that can be recovered and refundability criteria vary from province to province.
Although the provincial R&D tax credits must be deducted from the base of the federal SR&ED tax credit, the combined benefit is up to 2 times higher than the benefit of the federal SR&ED tax credit alone. In addition to reducing provincial taxes payable, many provinces have R&D tax credits that may be refundable.
Canadian-Controlled Private Corporations, foreign-owned, publicly traded companies, and partnerships.
The SR&ED program also allows for the inclusion of the following expenses:
- Contract expenditures for SR&ED performed on behalf of the claimant
- Salaries and wages incurred by the firm on SR&ED activities conducted abroad
- Overhead costs, which may be calculated by a simple proxy method
These features make Canada’s SR&ED program truly one of the most generous and accessible R&D tax incentives in the industrialized world.
- Basic research:
- Scientific knowledge/advancement without specific practical application.
- Typically, this kind of work is carried out by universities or research institutes that publishes peer reviewed science journals.
- Applied research
- Scientific knowledge/advancement with specific practical application.
- For example, where you’re determining out the properties of semiconductors with a goal to develop a semiconductor amplifier.
- Experimental research
- Any work that’s done to help you develop new products, materials, devices or processes or improve existing ones would fall into this category.
- Approximately 95% of SR&ED claims fall under experimental research.
Some elements of SR&ED work may involve the application of techniques, data, and procedures that are generally known and available. However, when those elements of work are used to support SR&ED work, they may be eligible as well, for example:
- design, operations research
- mathematical analysis
- computer programming
- data collection
- testing or psychological research
When any of these elements of work are used to support SR&ED work, they may be eligible also.
- Market research or sales promotion
- Quality control or routine testing of materials, devices, products or processes
- Research in the social sciences or the humanities
- Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas
- Commercial production of a new or improved material, device or product or the commercial use of a new or improved process
- Style changes
- Routine data collection
Businesses across many industries qualify for the SR&ED program, including the ones below. However, the nature of the R&D work you do is more relevant than your business sector when determining eligibility for the program.
- Software & Information Technology
- Manufacturing & Engineering
- Agriculture and Agri-food
- Biotech, Life Sciences & Medical Technology
- Clean Tech & Sustainable
- Technologies Oil & Gas, Energy & Mining
- Media & Communication
- Other Industries
The CRA’s criteria for determining if there was SR&ED, involves answering the following questions:
What scientific or technological uncertainties did you attempt to overcome?
What work did you perform in the tax year to overcome the scientific or technological uncertainties?
What scientific or technological advancements did you achieve or attempt to achieve as a result of the work?
Your documentation needs to substantiate that the expenditures claimed are eligible for the credit. It needs to be:
- Contemporaneous – documented at the time the SR&ED was done.
- Dated – proves the work occurred in the fiscal year you are claiming.
- Highlights technical challenges –- it substantiates the SR&ED performed.
Documentation can be in any of the following formats:
- Task management software (ex. Asana,Trello)
- Prototypes, including software and physical products
- Test documents or models
- Git & Github tracked revision history
- Developer or Engineering Notebooks
- Meeting minutes
- Whiteboard photos
- Invoices/ receipts
- Contractor agreement outlining the statement of work
The Canada Revenue Agency emphasizes the importance of keeping supporting contemporaneous documentation. Properly documented timesheets are the optimal medium of SR&ED documentation. All employees and or contractors should record 100% of their work and distinguish if their time was allocated towards eligible SR&ED or non-SR&ED related activities. This additional step simplifies and more accurately allows organizations to calculate eligible SR&ED expenditure.
The SR&ED reporting deadline is 12 months after the filing due date for a return, which is dependent on the type of taxpayer. For example, the SR&ED reporting deadline for corporations is generally 18 months after the tax year end.
The Canada Revenue Agency (CRA) has the following service standards for processing SR&ED claims:
- All claims which have been accepted as filed will be processed within 60 calendar days of the date we receive a complete claim.
- Refundable claims selected for review/audit will be completed within 180 calendar days of the date we receive a complete claim.
On average, from what we’ve seen from our clients it usually takes around 75 days for refunds to process.
Your SR&ED claims must be filed within 18 months following your fiscal year end. For example, companies with a year-end of December 31, 2020, must file their SR&ED claim by June 30, 2022.
Your company does not have to be profitable to apply for an R&D refund. SR&ED can be a refundable tax credit even if you did not pay taxes. In addition, any unused tax credits can be carried backwards.
The eligible SR&ED work only has to be new to your company.
In the event, similar products or processes are already available, so long as you had to overcome technological challenges that could not be readily resolved using knowledge in the public domain, and you attempted to resolve these challenges in a systematic way, then you are eligible for the SR&ED tax credit.
SR&ED tax credits may still be obtainable for failed, abandoned, or postponed projects because the technological advancement in such projects resides in the 'lessons learned' and the in-house expertise conceived during the systematic investigation.
Work subcontracted to other entities on your behalf may qualify for the SR&ED tax credit, however, there are certain limitations. The work must be performed by independent contractors with whom you are at arm's length. In addition, you must retain the intellectual property rights to the work performed.
If the Canadian Revenue Agency determines certain claims require specific investigation and further review, the audit must be completed within 180 days that a complete claim was received.
Your company will not be subject to any general audit by the CRA, which covers anything other than your SR&ED claim. The CRA's policy is to review only expenses related to the R&D claim. In reviewing these expenditures, the CRA may request to visit you, particularly if this is your first R&D claim to verify the amounts claimed.
The technology advisors will determine whether your project meets the SR&ED eligibility requirements, and the financial reviewer will determine whether the costs you claim for the work are allowable.