SR&ED tax treatment

What is a SR&ED Tax Credit

The Scientific Research & Experimental Development (SR&ED) Tax Credit is a Federal tax incentive administered by the Canada Revenue Agency (CRA). Its purpose is to encourage Canadian businesses of all sizes and in all sectors to conduct research and development in Canada.

The SR&ED program is Canada’s largest industry innovation focused tax credit program, with $3 billion being claimed by 20,000 Canadian businesses annually. The overarching goal is to incentivize organizations to conduct research and development (R&D) activities in Canada. For SR&ED qualified projects, companies can claim the following expense in arrears: payroll (66%), materials (42%) and subcontracts (34%). All provinces and territories, except Alberta, have corresponding SR&ED programs but vary with the reimbursement amounts. Companies will receive the provincial portion of SR&ED according to the rule of the province where the SR&ED is performed.

The program is targeted towards small and medium enterprises, sometimes defined as a Canadian Controlled Private Corporation (CCPC), as they receive amore lucrative credits. Across all Canada, except for Alberta, there are various Provincial and Territorial SR&ED programs that have been harmonized with the Federal program. This just means that when you qualify for the Federal program, you will also qualify for the provincial / territorial programs where the business activities occurred. Funding is provided as a tax credit to reduce income tax payable. In some instances, SR&ED tax credit rates may be fully or partially refundable, resulting in a cash reimbursement.

For a business activity to be considered eligible for SR&ED, it must meet two conditions:

  • It occurs in Canada; and
  • It must include basic research, applied research or experimental development.

The latter bullet can be refined further for clarity. Section 248(1) of the Income Tax Act describes it as “…systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…”.

We can apply some principles to judge if work can qualify or not. In order to secure credits you must demonstrate that you have carried out “qualifying work”. SRED qualifying work means you’re your project faced technological uncertainty. Another way to look at this is that the project must have had a chance of failure as in you were not sure if it would work

Other requirements include being systematic and documenting the process but technological uncertainty is the meat of the matter.