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 42.29% 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.  

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:

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• The salaries or wages of staff performing R&D work (including some work performed outside of Canada)

• The cost of materials (scrapped parts, jigs, fixtures, test beds, prototypes, etc) consumed while performing SR&ED, including scrap created during experiments and test runs

• Costs for Canadian subcontracting who performed SR&ED on your behalf

• SR&ED related overhead costs, or a proxy for these costs

• Third-party payments for work done in support of the development projects

• Scrap created during experiments and test runs

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 five tests for eligibility, as set out by CRA:

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1. Was there a scientific or a technological uncertainty?

2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?

3. Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypothesis by means of experiment or analysis?

4. Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?

5. Was a record of the hypothesis tested and the results kept as the work progressed?

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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.

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Eligible SR&ED may include:

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• Experimental development – defined as work undertaken to achieve a technological advancement (for the purpose of creating new or improving existing materials, devices, products, or processes), including incremental improvements (most often a factory floor, design or engineering setting)

• Applied research – work undertaken to advance scientific knowledge with a specific practical application in view.

• Basic research – work undertaken to advance scientific knowledge without a specific practical application in view (most often a university or laboratory setting). 

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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.  

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• Are you overcoming unexpected challenges to optimize your process or product? 

• Has your company developed existing processes, or invented new methods to increase the productivity of your manufacturing plant? 

• Have you developed any new products? Have you developed innovative features to improve existing products?

• Does your staff include technically trained personnel, whose activities involve innovative work? 

• Has your company built prototypes or test devices to evaluate or accommodate a new product or process? 

• Have you developed specialized in-house software to assist your specific industry? 

• Does your company combine or use existing technology in new ways? 

• Have you experienced projects with failures or unexpected problems that needed to be resolved? 

• Has your company undertaken projects necessitating multiple designs, design models or alternate courses of action to address technological or scientific problems?

WHAT ACTIVITIES ARE NOT ELIGIBLE FOR SR&ED BENEFITS?

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

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• Commercial production of a new or improved material, device, or product, or the commercial use of a new or improved process 

• Quality control or routine testing of materials, devices, products, or processes 

• Development based solely on design or routine engineering practice 

• Social science and humanities research 

• Market research or sales promotion 

• Style changes 

• Routine data collection 

• Prospecting, exploring, or drilling for (or producing) minerals, petroleum, or natural gas

HOW THE CREDITS WORK

For Canadian Controlled Private Corporations (CCPCs), the Federal government provides a refundable tax credit at a rate of 15-35%.  If you meet certain criteria (less than $500k of taxable income and less than $25M 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. 

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In addition to the Federal credit, Ontario’s Provincial government offers up to 8% and 3.5% through wo 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 15% Federal SR&ED tax credit as well as a 3.5% Provincial credit.  While not refundable (i.e. not cash), these credits can be carried forward up to 20 years, or back as many as 3 years, to help reduce the enterprise's Federal tax liability dollar for dollar. 

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.