Business

What Is SR&ED: Scientific Research & Experimental Development

Canada is among the most technically advanced countries globally, and for a good reason, the government promotes research and development.

R&D, according to the OECD Frascati Manual, R & D is defined as “creative and systematic work undertaken to increase the stock of knowledge – including knowledge of humankind, culture and society – and devise new applications of available knowledge.”

From space exploration to biotechnology, Canada wants to continue fostering local talent and attracting businesses to conduct their R&D in the country. How do they do this? One of the ways is through SR&ED. What is SR&ED? Let’s unpack it for better understanding.

What is SR&ED?

SR&ED stands for Scientific Research & Experimental Development and is essentially a tax incentive program in Canada to stimulate research and development within its borders. The SRED program attracts around 22,000 claims per year, providing tax credits topping 3.5 billion by reducing tax liability for current or future years.

These tax incentives include income tax reduction, investment tax credit and refunds.

  • Income Tax Reduction: Any SR&ED expenditures can be pooled and deducted against the current year or saved for another year in the future.
  • Investment tax Credit: These are earned credits to reduce payable income tax. From the eligible SR&ED work, your ITC will be between 15-35% of your qualified SR&ED expenditures, and they can be carried forward for up to 20 years or back three years to be applied against the payable tax.
  • Refunds: Sometimes CRA will refund the remaining amount of ITC. Canadian-controlled private corporations (CCPC) and other corporations, trusts and individuals can earn refundable and non-refundable ITCs at different rates depending on the amount of expenditure.

SR&ED eligibility

SR&ED is a great program for Canadian businesses and helps incentivize technological advances that make them innovate. It can be a little complicated so make sure you are eligible for this program and then use it to your full extent. Then, your company can thrive and continue to lead the way in the scientific research & experimental development space.

Canadian companies must make these tax claims, regardless of size, industry sector, or technology field. They must also meet the eligibility requirements, and the work needs to be related to their business with expenditures incurred.

  • Research: This is undertaken to advance scientific knowledge with or without a specific practical application, known as basic and applied research.
  • Experimental Development: Work was undertaken to achieve technological advancement for creating and improving products, materials, devices, processes, even if it is incremental.
  • Supporting Work: Support work is considered engineering, design, operations, research, mathematical analysis, computer programming, data collection, testing, and psychological research.

Non-Eligible Actives include:

  • Market research
  • Quality control
  • Sale promotion
  • Devices
  • Processes
  • Products
  • Humanities and social sciences research
  • Style changes
  • Overhead expenditures
  • Routine data collection
  • Petroleum, natural gas or mineral production and the prospecting, exploring or drilling of it.

Eligible Expenses

These eligible expenses include wages and salaries for those employees directly working on the eligible R&D work and the overhead costs and material. Capital expenses are not eligible, including machinery, equipment and buildings, but a capital cost allowance may be deducted.

SR&ED deadlines

To be eligible for the tax incentive, a corporation must file a claim 18 months from the end of the tax year where they incurred the expenditures regarding the claim. Individuals have 17.5 months.

Other SR&ED Information

Once accepted, there is a 60 calendar day period for processing claims after receiving the completed claim. If the claim is under review or being audited, the time extends to 180 calendar days. Because the SR&ED tax credit reviewers are separate from tax auditing personnel, there is no increased risk of your business being audited.

As long as the company is a Canadian-controlled private corporation, they are eligible for the tax credit. You may be getting other tax credits with OIDMTC or IRAP. These will not interfere with the SR&ED tax credit except that it may be deducted from the IRAP and the costs claimed with OIDMTC are not the same. Claim the SR&ED first because it usually will be processed faster with a larger refund.

Suppose you are developing a similar project in the market, where a competing company is doing the same. In that case, you will still be eligible if you’re building on your project base and adopting it or adding to it. If you are using outside contractors in your R&D and are doing most of the work, you must own the work to be eligible, and the contractor cannot be related to your company or controlled by you.

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