The Scientific Research and Experimental Development (SR&ED) program, is a Canadian tax incentive initiative that helps small to large businesses in all sectors perform research and development within Canadian borders. SR&ED lets organizations reduce tax liability for a current year or a future year. Tax incentives from this initiative come in three options: an income tax deduction, an investment tax credit (ITC), and, in a few circumstances, a refund.
Every year approximately 22,000 claims are processed totalling over $3.5Billion in investment tax credits.
The SR&ED, the largest source of Canadian federal government funding help, incentivizes business-led research and development projects. To further understand this program, we will cover how this program began, who’s eligible for this program, and how to benefit from it with your R&D activities.
How’s Research & Development Defined?
An internationally used definition of research and development has been adopted through the Frascati Manual to compare R&D efforts made between various countries. The efforts among and beyond the Organisation for Economic Co-operation and Development (OECD) countries to summarize recommendations in this manual ultimately resulted in a source of reference for science, research, and economic policy makers. The Frascati Manual defines R&D as, “creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge.”
How Did the SR&ED Program Start?
The Canadian government began using the Income Tax Act in 1985 to stimulate research and development projects via the SR&ED incentive program. The Canada Revenue Agency (CRA) delivers SR&ED funding; however, the Department of Finance makes the laws.
In the Income Tax Act, SR&ED is defined to be, “a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…to advance scientific knowledge (basic or applied research) or to achieve technological advancement (experimental development) for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto…”
SR&ED is specific to Canadian taxpayers / businesses; however, many OECD countries operate with a similar type of research and development incentive program. However, Canada’s SR&ED program is among the most funded on a global scale.
Who Can Claim SR&ED Tax Credits?
A company that conducts business within Canada may be able to claim SR&ED if they meet the eligibility requirements, the work is related to their business, and expenses are incurred. Canadian-controlled private corporations (CCPC) are included, as well as public corporations, partnerships, and other corporations. Read about the businesses and organizations eligible for SR&ED tax credits for more information.
What are Eligible SR&ED Tax Credit Activities?
SR&ED activities may be eligible if they meet the following criteria:
- Basic research: projects that advance scientific knowledge without an identifiable practical application;
- Applied research: work undertaken for the advancement of scientific knowledge with an identifiable practical application;
- Experimental development: projects with a purpose of advancing technology for making new, or improving existing, materials, devices, products, or processes, (incremental improvements may be included); or
- Support work: engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research.
To secure eligibility, an organization needs to show why the work was undertaken (for the purpose of achieving a scientific or technological advancement) and how the work was carried out (systematic investigation).
Timelines for filing SR&ED claims
Claims for SR&ED must be filed before reporting deadlines; 18 months for corporations. If approved, your SR&ED tax credits may be refundable in cash, offset payable taxes, or carried forward for up to 20 years.
Apply for SR&ED Funding
SR&ED’s reporting deadline of 18 months initiates from the end of the tax year in which the qualifying expenses were incurred. Does your organization need application assistance? Book a meeting with our professional SR&ED consultant team or give us a call at 1-888-599-3111 to determine your eligibility for the Scientific Research and Experimental Development SR&ED tax credit.
Canada’s largest R&D funding programs are the Industrial Research Assistance Program (IRAP) grant and the Scientific Research and Experimental Development (SR&ED) tax credit. Find out how to distinguish these two programs and when you may be eligible for one with this free IRAP vs. SR&ED slide deck.
Mentor Works is a business support organization specializing in Canadian government funding. The Ontario-based business has helped hundreds of businesses build and execute their funding strategy through a mix of federal and provincial government grants, loans, and tax credits. Mentor Works offers free online resources, funding webinars, and news via their website at www.mentorworks.ca.
Author: Nathan Chick