What is SR&ED?
What businesses are eligible?
How does SR&ED help my company?
What expenditures qualify?
What activities qualify as SR&ED? (basic definition)
What activities qualify as SR&ED? (detailed definition)
What activities are not eligible for SR&ED benefits?
How the credits work

Technological Advancement - Technological Content - Technological Obstables - Accolade

What is SR&ED?

SR&ED is the acronym for the Federal government’s Scientific Research and Experimental Development program (pronounced “SHRED”).

SR&ED is the largest source of Federal government support for research and development in Canada, providing over $4 billion to over 18 000 claimants each year.  Approximately 75% of claimants are small businesses, while approximately 90% of the money distributed by the SR&ED program is for development projects (i.e. on the “shop floor”).

Widely recognized as one of the most favourable R&D tax credit programs in the world, SR&ED is a Federal and Provincial program providing tax credits (of up to 46% on eligible expenditures) to Canadian businesses conducting research and development in Canada.  Administered by the Canada Revenue Agency (CRA), the SR&ED program encourages industry (including small business and start-up firms), to develop technologically advanced products and processes in Canada

SR&ED incentives can be received in the form of tax credits or tax refunds. Currently, the Federal government estimates that less than half of the companies performing eligible SR&ED activities are claiming them. 

What businesses are eligible?

ANY individual or business operating in and performing R&D in Canada may claim SR&ED.  ANY individual or business involved in basic or applied research, or developing new/improving existing materials/products/processes may be eligible to receive SR&ED tax credits.

Canadian-controlled private corporations, publicly traded, foreign owned corporations as well as individuals (proprietorships), partnerships or trusts may claim SR&ED.

How does SR&ED help my company?

Utilizing every viable SR&ED tax credit should be every company’s goal, as many companies often carry out several activities that qualify for SR&ED tax credits.  Qualifying companies receive up to 46% of your R&D expenditures back - which can be used to help finance future projects, improve your company’s overall financial position, and better position your company for future SR&ED projects. 

In addition to SR&ED tax credits, the program allows for a 100% deduction for current qualifying capital expenditures made on machinery and equipment used solely for R&D.

What expenditures qualify?

The SR&ED program allows your company to claim many of the costs incurred for performing research and development each fiscal year.  Claimable costs may include:

What activities qualify as SR&ED? (basic definition)

SR&ED development can be basically defined as work undertaken for the purpose of achieving technological advancement to create new (or improving existing) materials, devices, products or processes.  The work does NOT need to be revolutionary, and it doesn’t actually have to succeed.  Even incremental improvements to existing technology, materials, devices, products, or processes are considered eligible.

What activities qualify as SR&ED? (detailed definition)

Canada’s Income Tax Act defines SR&ED as a “systematic investigation or search, carried out in a field of science or technology by means of experiment, analysis, or modification”.  These investigations must encompass three tests for eligibility, as set out by CRA.

  1. Scientific or technological advancement – there must be an advancement or improvement in the company's standard practice or in the underlying technology of the project

  2. Scientific or technological obstacles – there must be some uncertainties or unknown solutions facing the business, therefore necessitating research or development to be carried out

  3. Scientific or technical content – a description of the research carried out in a systematic manner by qualified personnel 

A very common misconception is that such “systematic searches” are only ever performed by highly-skilled individuals wearing white lab coats – but 90% of the funds distributed by SR&ED are for systematic investigations performed by individuals working on the shop floor.

Eligible SR&ED may include:

There are many different activities that qualify as eligible expenses for the SR&ED program. Your company could very well be involved in these activities, and be unaware that they actually qualify for a refund.  The following questions are meant to guide you into recognizing the possibility that your company is performing SR&ED related activities. 

What activities are not eligible for SR&ED benefits?

The following activities are not eligible for benefits under the program:

How the credits work

For Canadian Controlled Private Corporations (CCPCs), the Federal government provides a refundable tax credit at a rate of up to 35%.  If you meet certain criteria (less than $400,000 of taxable income and less than $10M in taxable capital employed in Canada among all associated companies, in the year before the year being claimed for SR&ED), you can receive this tax credit as a cash payment to use toward your business’ bottom line.  In addition to the Federal credit, Ontario’s Provincial government offers up to 10% in additional tax credits, provided that the above criteria regarding taxable income and taxable capital are met.

Individuals (i.e. Sole Proprietors), publicly traded and foreign-owned businesses are eligible for a 20% Federal SR&ED tax credit.  While not refundable (i.e. not cash), these credits can be carried forward up to 20 years, or back up to 3 years, to help reduce the enterprise's Federal tax liability dollar for dollar. In addition to the non-refundable Federal credit, Ontario’s Provincial government offers a 10% refundable tax credit to companies with less than $400,000 of taxable income and less than $10M in taxable capital employed in Canada, in the year before the year being claimed for SR&ED.

To claim SR&ED, you must file a claim within 18 months of your fiscal year-end.  If you miss this deadline, you cannot claim any SR&ED tax credits for that particular year.  The most important part of the claim process is submitting a detailed project description of the qualifying activities.  CRA will use this report to determine whether or not your company has carried out the activities necessary to qualify for SR&ED tax credits.

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