Scientific research and experimental development (SR&ED) is defined in the Income Tax Act as:

“Scientific research and experimental development means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…”

In simple words , SR&ED is a Canadian federal tax incentive program run by the Canada Revenue Agency (CRA). It funds businesses who engage in science and technology research and development (R&D). This funding can be a direct cash payout or tax credits.

The purpose of SR&ED

SR&ED is one of the most generous federal programs in the world. It roughly provides $3billion-$4billion annually to firms, individuals and corporations operating in Canada, of which three-quarters are small businesses. The main aim is to encourage businesses to participate in R&D and improve or develop new technology, products and processes. Another reason is also to bring small firms and start-ups up to speed, and provide them with the help and assistance they require, to grow and prosper.

Benefits of SR&ED

By filing an SR&ED claim, you can get a refund of up to 35%+ of eligible expenses provided they do not exceed $300,000,000 and up to 15%-20% if expenditure is more than $300,000,000. This rate also varies from province to province and also depends on the type of business.

For Canadian controlled private corporations (CCPCs) the tax credits can be used to settle the taxes payable of the fiscal year ended and the remaining unused tax credits can be refunded. These unused tax credits can also be carried back three years and carried forward around ten to twenty years.

Partnerships, trusts and proprietorships can claim a cash refund of 40% of the unused tax credits whereas other corporations are not eligible to do this.

What qualifies as SR&ED?

For any work to qualify as SR&ED, it has to be basic or applied research, or experimental development.

  • Basic research: work taken on for the progression of scientific knowledge with no particular reason.
  • Applied research: work taken on for the progression of scientific knowledge with a specific purpose.
  • Experimental development: work taken on to attain technological advancement by improving an existing or introducing a new product, procedure, system, or practice.

It should be noted that any work or research done in support of basic/applied research or experimental development can qualify as SR&ED. This can include, design, psychological or operations research, testing, data collection, computer programming, engineering, research and mathematical analysis.

On the other hand, any work done for a commercial purpose like market research and advertisement along with work that would still be taking place even if SR&ED was not taking place - for example, standard data collection, regular testing and quality control - are not eligible for refunds under SR&ED program. This also includes expenses incurred due to changing routine practice or procedures and costs that arise due to exploration or extraction of natural resources from the land i.e. gas, petroleum, minerals and etc.

Expenditures that can be claimed

A firm can claim many of its expenses incurred under the SR&ED program. In fact, we recommend maximizing the SR&ED claim by including as many expenses as possible. These expenses mainly consist of salaries and wages paid to employees directly associated with SR&ED activities. It also includes day-to-day costs, payments made to third parties and overheads, as well as any materials used or transformed in prosecution of SR&ED work.

The rules about eligible expenses are extensive and we will discuss them as part of the application process.

Calculating eligible expenses

The calculation of your expenses can be done in two ways.

  • The traditional method: Using this method, you are required to simply claim all your SR&ED related expenses. You are expected to clearly specify your overhead costs.
  • The proxy method: This approach involves using a simple mathematical formula to calculate a substitute amount for the overheads.

Note: The claimant has full freedom in selecting their choice of method. However, if no method is expressly selected, the traditional method is automatically assumed.