incoming tax

R&D vs SR&ED

Research and Development is a general term for a very broad range of activities related to the pursuit of all types of science knowledge and technology.  The development part of R&D is generally considered to be applied science.  That is, the application of scientific knowledge and principles to produce working solutions which are of benefit to humans.  Einstein’s work to explore the properties of light and gravity is basic research.  The Manhattan Project in World War II led by Oppenheimer and many others took Einstein’s E=MC squared and produce the atom bomb in a massive development exercise.

SR&ED is a Canadian federal government program which incents Canadian technology companies to carry out specific types of R&D activities.  Companies which meet the criteria for these activities are performing qualifying work which is highly incented by the Canadian government.  Small business corporations, called CCPCs, can earn up to 68 cents on the dollar of salary paid to staff engaged in SRED qualifying work.  SRED money for CCPCs is paid out as refundable tax credits.  That means the credits are cash.  A start-up or a money losing firm receive their SRED credits regardless of whether they earn profits or pay corporate taxes.  Approximately 20,000 Canadian companies receive funding annually under this $3B program.  Each province has a piggyback program which kicks in an additional approximately $1B aggregate for work carried out in individual provinces.

So, some differences between R&D and SR&ED are immediately apparent.  SR&ED is a subset of R&D.  The Program has been in place since 19984 and the exact definition of what constitutes work which qualifies as SRED has been refined over the years.  SR&ED definitions are laid out in the Income Tax Act.  The SR&ED program is administered by specialized CRA personnel called Research Technology Advisors, RTA’s, and Financial Advisors.  A percentage of the 20,000 claims are reviewed each year to ensure that the work claimed meets the definition of SRED qualifying work.

Here are some examples of work which are R&D but do not qualify as SR&ED.  All testing to certify a new product for use in a new market or application.  So getting a CSA sticker for a new toaster is R&D work but it is not SR&ED.  All quality control work is considered a production activity by SRED so it is not qualifying work.  Much QA work is R&D of course.  Routine software programming is R&D.  For SRED software programming is considered to be a support activity.  It only counts as SRED when it is necessary to be carried out in the course of a qualifying experiment.  Market research, product and vendor selection are more examples of work which is certainly R&D but is not SR&ED.

SRED qualifying work focuses on experimental work.  The government want to pay companies for work which has a risk of technological failure.  It is the government’s belief that carrying out this sort of difficult, risky work will, over time, raise a company’s technology base.  This technology base increase will result in competitive advantage for Canadian technology companies.

SR&ED work is heavily centered around ED work, that is experimental development.  The government says that 95% of SRED funding each year goes toward ED versus only 5% toward basic research.  This makes sense when you consider that SRED is only available to for-profit corporations.  Most of the basic research in Canada is carried out by universities, government facilities, research organizations and other non-profits who do not qualify for SRED funding.