SR&ED, short for the Scientific Research and Experimental Development program, is a Canadian tax incentive initiative aimed at motivating businesses of all sizes and sectors to engage in research and development within Canada. This program enables businesses to lower their tax obligations in the current year or in future years. The tax incentives are available in three forms: an income tax deduction, an investment tax credit (ITC), and, in specific situations, a refund.
The Scientific Research and Experimental Development (SR&ED) tax credit represents the largest source of financial support from the Canadian federal government, aimed at encouraging business-led research and development initiatives. This article will explore the origins of the program, outline eligibility criteria, and explain how businesses can leverage it to enhance their R&D efforts.
What is Research & Development Defined As?
The Frascati Manual provides internationally recognized definitions of research and development to facilitate more accurate comparisons of R&D activities across different countries. The collaborative efforts among and beyond the Organisation for Economic Co-operation and Development (OECD) member countries to define and implement the guidelines outlined in this manual have yielded a valuable resource for policymakers in science, research, and economics. According to the Frascati Manual, research and development is defined as “the creative and systematic work undertaken to enhance the stock of knowledge—including knowledge of humanity, culture, and society—and to develop new applications of existing knowledge.”
How Did the SR&ED Program Start?
Since 1985, the Canadian government has leveraged the Income Tax Act to promote research and development initiatives through the SR&ED incentive program, which aligns its definition of research and development with the Frascati definition. The Canada Revenue Agency (CRA) oversees the implementation of the program, while the Department of Finance establishes the related legislation.
The Income Tax Act defines SR&ED as “a systematic investigation or search conducted in a field of science or technology through experimentation or analysis…to advance scientific knowledge (basic or applied research) or achieve technological advancement (experimental development) with the aim of creating new or enhancing existing materials, devices, products, or processes, including incremental improvements thereof…”
The SR&ED incentives program is designed specifically for Canadian taxpayers and businesses; however, many OECD countries offer similar research and development incentive programs. Canada’s program is recognized as one of the most generous globally.
Who Can Claim SR&ED Tax Credits?
Companies operating in Canada can claim SR&ED if their work meets the eligibility criteria, is related to their business activities, and involves incurred expenditures. This includes Canadian-controlled private corporations (CCPCs), public corporations, partnerships, and other types of corporations. Discover more about the businesses and organizations that qualify for SR&ED tax credits.
What Activities are Eligible for SR&ED Tax Credits?
Work that may qualify for SR&ED includes:
- Basic research: Efforts aimed at advancing scientific knowledge without a specific practical application.
- Applied research: Efforts focused on advancing scientific knowledge with a specific practical application in mind.
- Experimental development: Activities aimed at achieving technological advancement to create new or enhance existing materials, devices, products, or processes, including incremental improvements.
- Support work: Activities such as engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research.
To determine eligibility, it is essential to clarify why the work was undertaken (to achieve a scientific or technological advancement) and how it was conducted (through a systematic investigation).
What are the timelines for filing SR&ED claims?
Your SR&ED claim must be submitted by the reporting deadline, which is 18 months for corporations. Once funding is approved, your SR&ED tax credits may be refundable in cash, applied to reduce taxes owed, or carried forward for up to 20 years.
Apply for SR&ED Funding
The Scientific Research and Experimental Development (SR&ED) program has a reporting deadline of 18 months following the end of the tax year in which the qualifying expenses were incurred. For assistance with your application, please schedule a meeting with our SR&ED consultant team or call us at (780) 446-4543 to find out if your business qualifies for the Scientific Research and Experimental Development (SR&ED) tax credit.
