Explore tax credits for IT software R&D

Many software companies and start-ups in Canada are claiming a valuable investment tax credit (ITC) which frees up funds for growth.

Based on CRA’s annual SR&ED program statistics, a significant proportion (approximately 40%) of investment tax credits relate to software development activities.

But some chief technology officers and engineering leads are not aware that their dev work is eligible for this tax credit. Here’s a quick explainer about the Canadian SR&ED program.

It’s more complicated than ‘free money for coding’

Only certain types of software development work qualify for the SR&ED tax credit.

The development work has to involve systemic investigation that resolves technical challenges and it should aim to solve hard, novel, technical problems which concern technical boundaries, not just business logic.

Many chief technology officers choose to get professional support with their company’s tax credit application. At Canadian SR&ED, our experienced claims specialists can evaluate your project to ensure the claim will be successful and we will walk you efficiently through the process. Get in touch to find out more.

How much could the SR&ED tax credit be worth to me?

The SR&ED tax credit could help Canadian-controlled private corporations (CCPCs) regain up to 35% of qualifying R&D expenditure, plus provincial incentives. Other entities will reclaim at lower rates (typically 15%).

To get an idea of how much you could claim from SR&ED, try our calculator.

Which software development projects will qualify for SR&ED?

Software development projects have to meet some requirements if they are to be eligible for the SR&ED tax credit.

The project should target a clear technological uncertainty that competent professionals can’t resolve.

The development should involve a systematic process of investigation or structured experimentation, such as benchmarking, testing variants and profiling.

The software should represent a technological advancement, by generating new knowledge, not just applying it.

However, the project doesn’t have to be successful to be eligible for the tax credit.

Examples of software development projects that might qualify for SR&ED

The intention behind this incentive is to provide support for genuine engineering risk by subsidizing efforts to resolve technical uncertainty – so it is not meant to support general product development. Here are some examples of software R&D that could qualify for the ITC.

An experimental algorithm for high-volume financial transactions processing

A bank finds that existing algorithms don’t achieve the throughput it needs for high-volume financial transaction processing, so it uses an experimental approach to build a custom algorithm.

Scaling backend architecture for a software package

The provider of a software package used in the construction industry under an SaaS model needs to upgrade its backend architecture to enhance performance and reliability at scale if it is to expand into global markets. There is uncertainty as to whether the system can be scaled without failure. A development team experiments with architectural choices. The knowledge gained extends beyond routine cloud set-up.

Check your IT software development work against our SR&ED eligibility tool.

Software development activities that won’t be SR&ED eligible

These are examples of software development projects that won’t meet the SR&ED criteria:

routine feature development
UI/UX redesigns
standard API integrations
cloud migration using known patterns
bug fixing and maintenance

Why do software SR&ED claims get rejected?

Common reasons that software companies’ SR&ED claims get rejected include:

work is described as developing product features rather than addressing technical uncertainty
lack of contemporaneous documentation
no clear experimentation or iteration
projects framed as routine development

One common mistake that software engineers make with their SR&ED application

Documentation for a software development project typically shows business goals, customer outcome and project milestones. However, for a successful ITC application, the documentation also needs to demonstrate intent, experimentation and learning.

As SR&ED experts, we have seen developers who try to apply a narrative of experiment to their documentation after the project is completed, but this often backfires and will contribute to a failed SR&ED application.

It is better to start with processes that support a systematic approach. Some software development approaches are simpler to map on to the SR&ED application than others – iterative and incremental approaches are a good fit.

Drawing on the expertise of SR&ED experts from the start of the project can streamline your documentation so that it integrates seamlessly into the application process. To learn more, book a call with Canadian SR&ED today.