scientific research and experimental development canada

Language selection

• Français fr

Introducing the Scientific Research and Experimental Development Client Portal!

October 22, 2024

Ottawa, Ontario

Canada Revenue Agency

The Scientific Research and Experimental Development (SR&ED) tax incentive program provides over $3.7 billion annually in tax incentives to businesses who conduct research and development in Canada. The program is available to businesses of all sizes and in all sectors, including biomedical technologies, clean technologies, electrical engineering, and more. For information on what work is eligible for SR&ED, visit What work is eligible .

Your new workspace

As part of the Canada Revenue Agency’s (CRA) commitment to develop more accessible tools and services, we are proud to present the new Client Portal for SR&ED claimants, now available through My Business Account . The portal is a one-stop workspace designed to help you start building your SR&ED claim, interact with the CRA, and more!

The Client Portal features a pre-claim workbook equipped with tools and support that allow you to write project descriptions and determine SR&ED expenditures, so you are better prepared to complete Form T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim .

The workbook allows you to:

• Save your progress and return at a later time
• Request assistance from an SR&ED specialist
• Access key SR&ED program information

Through the Client Portal, access comprehensive information on processing times and better understand what to expect after you submit your claim. In addition to the pre-claim workbook, an updated version of our Self-Assessment and Learning Tool is now available exclusively on the Client Portal.

How to access the portal

If you already have an existing My Business Account, no additional registration is required.

Login and go to the “Corporate Income Tax” link located on the left panel. Select “RC0001”, then click on the tab “SR&ED” in the middle of the page. For more information or to register for an account, visit About My Business Account .

Visit canada.ca/taxes-sred to learn more about the SR&ED tax incentive program.

We’re here to help! Contact us today if you have any questions.

Media Relations Canada Revenue Agency 613-948-8366 [email protected]

Page details

KPMG Personalization

The SR&ED landscape in Canada

How changes to the SR&ED program can benefit your business – and what you can do to prepare

• Share Share close
• 1000 Save this article to my library
• View Print friendly version of this article Opens in a new window
• Go to bottom of page
• Home ›
• Insights ›
• The SR&ED landscape in Canada

Canada’s Scientific Research and Experimental Development (SR&ED) program offers tax incentives to over 20,000 organizations annually, totalling about $4.2 billion that help Canadian businesses fund their research and development projects.

If your company has not yet considered applying for SR&ED tax credits or if you have found the process challenging in the past, some potential changes to the program offer good reason to consider participation in this program.

What is SR&ED?

SR&ED work entails a systematic investigation or search that is carried out in a field of science or technology through experiment or analysis including:

• Basic research: work undertaken to advance scientific knowledge without a specific practical application in view.
• Applied research: work undertaken to advance scientific knowledge with a specific practical application in view.
• Experimental development: work undertaken to achieve technological advancement, or create new or improve existing materials, devices, products or processes, including incremental improvements.

Broader SR&ED rules could increase access to tax incentives for your company

Canada’s productivity trails behind that of other countries, which helped spur the federal government to consult with Canadian companies in 2024 to enhancing the SR&ED program to encourage more innovation and productivity. The consultation is now in phase 2, which came with specific questions that hinted at changes being investigated by the Department of Finance to enhance the SR&ED program for Canadian businesses in one or more of these key areas:

• Broadening access to refundable tax credits: to include Canadian public companies that have only earned credit towards tax owed, providing even more incentive for these companies to research and innovate.
• Expanding eligibility definitions: to include innovation activities that are closer to commercialization than may have previously been allowed.
• Introducing new incentives for Intellectual Property (IP) creation:  revenues from IP that may or may not be derived from eligible SR&ED could be subject to more attractive income tax rates than traditional revenues.

82% believe SR&ED should be expanded to cover a broader range of activities and expenses, such as equipment and the commercialization of research, even if the program had a lower ITC

78% acknowledged that the R&D their business performs is currently not eligible for SR&ED

81% of leaders say they would conduct more R&D if the government introduced a patent box model, which would provide a lower corporate tax rate on revenues derived from Canadian IP

What SR&ED related expenses can you claim?

• Labour and overhead:  including salaries and wages for employees performing qualified work.
• Contract payments: for qualified work performed at arm’s length on your behalf by companies within Canada.
• Materials: that were consumed or transformed as part of the SR&ED work, excluding capital.
• Third-party payments:  to universities, colleges, research labs, etc., to conduct SR&ED on your behalf.

Take control of your SR&ED claims process now

If your internal staff are underclaiming or being conservative on claims, or if this is your first SR&ED claim, do not wait until after the government implements these program enhancements. It’s important to get used to preparing these claims now including developing best practices, documentation, and record keeping approaches to support your claims.

That’s because SR&ED claims are filed retroactively with your tax returns – you are looking over activities you have already completed and seeing which could meet program requirements – so having good practices and approaches in place before you begin will help make the process easier and more efficient, compared with rushing to identify activities you may not be able to substantiate after the fact. You will gain valuable experience and knowledge to help ensure your SR&ED claims are supported and successful once the enhanced rules take effect.

You can start now by establishing effective processes, such as:

• Documenting what you’ve tested and trialed in the SR&ED space, along with the associated labour, materials, overhead, contracts and third-party payments expenses.
• Creating project charters that define each project’s objectives, technology risks, employee responsibilities, and implementation plan.
• Logging the time spent and costs you incurred so you can readily calculate and assess the size of claim and potential benefits.

Maximizing benefits: How uncovering eligible R&D related work hours led to nearly $60,000 in extra incentives for a software company

Labour costs are typically the largest component of a SR&ED claim, in most cases providing $1.55 of qualified expenditure for each dollar spent. That means accurately capturing all labour hours and their corresponding hourly rates is crucial for maximizing SR&ED benefits, particularly since the program operates on a self-assessment basis.

Recently, the KPMG Tax Incentives team reviewed the SR&ED claim for a software company. This company had been claiming their core dev team efforts, but was not considering directly supporting activities which were commensurate with the needs of their research and development.

Identifying an appropriate knowledge base level for eligible work in this field can be challenging due to the vast amount of open-source and publicly available knowledge, especially in rapidly evolving areas like machine learning and large language models.

KPMG’s experienced SR&ED professionals approach each claim with the knowledge and resources to help ensure clients are making the most of SR&ED tax credits. In this case, working with the software company, an extra 1,500 hours of research and development related work was found that helped the organization increase their benefits by nearly $60,000 – funds that could have been overlooked without the help of an experienced team.

How we can help

Our SR&ED professionals can help you navigate the technical and financial eligibility requirements and ensure you have strong practices and processes to support your claim. We help ensure you’re not over or under claiming SR&ED tax credits – but that you claim and receive the right amount of incentives your organization deserves.

We can help explore your eligibility to receive SR&ED tax credits for your projects through:

• Planning and scheduling to ensure you meet critical claim submission timelines and deadlines.
• Analyzing R&D projects you conducted in the last tax year to determine which are eligible for tax incentives.
• Review your prepared claims to identify those projects or costs which are missing that would yield a beneficial return.
• Identifying expenditures and preparing qualified expenditure schedules for preparation of your corporate returns.
• Drafting technical reports that outline each qualifying projects’ details in alignment with the prescribed format required by CRA.
• Conducting a documentation review including technical and financial working papers to support your project position and auxiliary calculations.
• Conducting financial or technical audits that support your claim’s review by the tax authority and the final approval of your investment tax credits.

Our teams can help your business successfully navigate Canada’s SR&ED tax incentive program and other government funding incentives – from understanding the SR&ED landscape and your place in it to maximizing the benefits your company is eligible to receive. Our professionals work with your organization to help prepare strong SR&ED claims that can unlock the full potential of this vital corporate tax incentives program – and we are here to support you every step along the way.

About the KPMG Business Survey - Federal Budget 2024 Edition

KPMG in Canada surveyed 534 Canadian companies between February 3 and February 27, 2024, using Sago's Methodify online research platform. All respondents are business owners or executive-level decision makers. Thirty-one per cent are leaders of companies with $500 million to $1 billion in annual gross revenue; 14 per cent, between $300 million to $499 million; 35 per cent, between $100 million and $299 million; 19 per cent, between $99 million to $10 million and the remaining one per cent, below $10 million. Seventy-five per cent of the companies are privately held and 25 per cent are publicly traded. Forty-two per cent are family-owned businesses.

• Scientific Research and Experimental Development (SR&ED) tax incentives, Annual program statistics. Canada Revenue Agency, Government of Canada, March 2024.

Insights and resources

Helping you explore your eligibility to recover investment tax credits and cash refunds for SR&ED expenditures

KPMG’s corporate tax incentives team determines eligibility to recover SR&ED tax credits

Plan – Analyze – Stack – Leverage

Seize incentive opportunities and invest in clean energy and technology projects today

Connect with us

Stay up to date with what matters to you.

Gain access to personalized content based on your interests by signing up today

Browse articles,  set up your interests , or  View your library .

You've been a member since

• Find office locations kpmg.findOfficeLocations
• Email us kpmg.emailUs
• Social media @ KPMG kpmg.socialMedia

Scientific Research and Experimental Development (SR&ED)

Earn retroactive research tax credits on costs..

The  Scientific Research and Experimental Development (SR&ED) tax credit is the largest single source of Canadian federal government support that incentivizes business-led research and development projects. The program provides more than $3 billion in tax incentives to over 20,000 claimants annually.

Watch our SR&ED 101 video series to learn more about the SR&ED program, it’s eligibility criteria, and how to leverage this tax credit for your business.

Funding Amount

Tax credits for up to 69% of labour and overhead costs, 36% of contractor costs, and 45% of material costs. All expenses must be commensurate with the needs of the scientific research and experimental development activity taking place within the company.

Eligible Applicants

Applicants must be operating either basic research, applied research, or experimental development in Canada and be developing new products, processes or making incremental improvements to them.

Eligible Activities

Eligible expenditures include labour, contractors, materials, and overhead costs that directly relate to and commensurate with the needs of the activity required to attempt to resolve the technological uncertainty, obstacle, or challenge.

Program Deadlines

The reporting deadline for this program is 18 months from the end of the tax year in which the qualifying expenses were incurred.

Provincial & Territorial SR&ED Variants:

In addition to the federal Scientific Research and Experimental Development program, there are also provincial and territorial variations of SR&ED that your business can apply to on top of the federal program. Most provinces and territories have one of more funding streams can be applied too with their own eligibility criteria, funding amounts, eligible expenses, and deadlines to apply. Learn more about these variations of SR&ED:

• New Brunswick Research and Development Tax Credit
• Newfoundland and Labrador Research and Development Tax Credit
• Nova Scotia Research and Development Tax Credit.
• Innovation Employment Grant (IEG)
• British Columbia (BC) SR&ED Tax Credit
• Manitoba Research and Development Tax Credit
• Ontario Innovation Tax Credit (OITC)
• Ontario Business-Research Institute Tax Credit (OBRITC)
• Ontario Research and Development Tax Credit (ORDTC)
• Saskatchewan Research and Development Tax Credit (Provincial SR&ED)
• Yukon Research and Development Tax Credit

Apply for Funding

Give your application the best chance at approval . Mentor Works has an 86% approval rating across all Canadian funding programs .

Amount of Tax Credit

The Scientific Research and Experimental Development (SR&ED) program offers different levels of funding depending on the eligible expense:

• Labour : Up to 69% of eligible salaries (including overhead).
• Contractor : Up to 36% of contractor costs.
• Materials : Up to 45% of materials consumed.

In addition to the federal credit, most provinces and territories also provide additional support of between 3.5% and 30% of eligible qualifying expenditures. See the full list of provincial funding amounts.

The federal Scientific Research and Experimental Development (SR&ED) program is offered Canada-wide  combined with provincial funding. With SR&ED being one of the largest tax incentive programs it is available to a wide range of Canadian businesses including:

Canadian-Controlled Private Corporations (CCPC)

• Canadian owned businesses subject to certain size tests may earn a refundable Investment Tax Credit (ITC) at the enhanced rate of 35% on qualified SR&ED expenditures of up to $3 million.  Eligible expenditures beyond this threshold or for CCPC’s not meeting the size tests attract a non-refundable ITC at 15%.  

Other Corporations

• Other corporations can earn a non-refundable Investment Tax Credit (ITC) at a rate of 15% on qualified SR&ED expenditures.

Individuals and Trusts

• Individuals and trusts can earn a non-refundable Investment Tax Credit (ITC) at a rate of 15% on qualified SR&ED expenditures.

Members of a Partnership

• The Investment Tax Credit (ITC) is calculated at the partnership level then allocated to eligible members (individuals, corporations or trusts).

Eligible Expenditures

Projects that are eligible to receive funding through the Scientific Research and Experimental Development (SR&ED) program must be conducting experimental development and/or research activities exhibiting some  level of uncertainty and risk as evidenced by the availability of solutions to overcome this uncertainty available in the public domain. Eligible labour expenses will cover the portion of an individual’s role that revolves around such experimentation. Eligible materials and supplies must relate to the qualifying projects to receive tax incentive funding.

• Based on time spent on eligible activities in Canada; and
• Limited ability to claim work outside Canada for Canadian employees.

Contractors :

• Contractors Portion of contract related to SR&ED performed on your behalf; and
• Must be Canadian contractors and work must be performed in Canada.

Materials :

• Consumed (i.e. scrapped) and Transformed, Prototypes, Trial materials; and
• Materials can be purchased from Canadian or non-Canadian suppliers.
• Proxy method: 55% of (adjusted) labour costs; and
• Traditional method: must be directly related and incremental to the prosecution of SR&ED.

SR&ED claims are due within 18 months of the fiscal year end of the corporation. Once the claim is filed, CRA reserves the right to conduct a review of the claim to determine whether the claimed projects meet the definition of SR&ED in the Income Tax Act.  In the event of a review, CRA may conduct a joint technical-financial review or just a financial review.  Upon approval, the SR&ED tax credits may be refundable in cash, used to offset taxes payable, or otherwise carried forward for up to 20 years.  These carry-forward credits may survive mergers, acquisitions, amalgamations and wind-ups under certain conditions.

To determine whether your business is eligible for benefitting through the Scientific Research and Experimental Development (SR&ED) tax credits, consider speaking with the Mentor Works team of Canadian government funding experts.

We provide an average 95% time savings to our clients, compared to businesses that apply for funding in-house.

Latest Scientific Research and Experimental Development (SR&ED) News

What is SR&ED? Research and Development Funding

Top Small Business Grants for Canadian Businesses

Canadian Grants and Loans for Video Game Development Studios

Navigating Research Collaborations with Post-Secondary Institutions

Top sr&ed resources:.

There’s a lot to learn about the Scientific Research and Experimental Development (SR&ED) program, so we’ve created this list of our top resources for businesses that are new to SR&ED tax credits and want to learn more about the program through helpful and easy to understand content. We recommend the following resources to get started:

• Article: What is SR&ED? Research and Development Funding
• Article: How to Determine if You’re Eligible for SR&ED
• Article: The How & Why of SR&ED Tax Credits
• Article: IRAP or SR&ED: Which R&D Funding is Right for Your Business?
• Article: Applying for SR&ED During Experimental Production
• Video: SR&ED 101: What is SR&ED?
• Video: How to Determine if You’re Eligible for SR&ED
• Video: The “How” and “Why” of the SR&ED Tax Credit

Home » A Deep Dive into the Scientific Research & Experimental Development (SR&ED) Tax Incentive

A Deep Dive into the Scientific Research & Experimental Development (SR&ED) Tax Incentive

• October 4, 2024

Table of Contents

The Scientific Research & Experimental Development (SR&ED) Tax Incentive is one of the most significant tax credit programs available to Canadian businesses, designed to promote innovation and growth in various industries. Introduced by the Canadian government, the SR&ED program offers tax credits to businesses that invest in scientific research or experimental development within the country. Whether you’re a large corporation or a small startup, this incentive helps to offset the costs of research and development (R&D), making it easier for companies to push the boundaries of innovation without facing overwhelming financial burdens.

At its core, the SR&ED program is meant to foster a culture of continuous improvement and technological advancement in Canada. By reducing the financial risks associated with R&D, the program empowers companies to explore new solutions, develop cutting-edge products, and create more efficient processes. Whether you’re working on a groundbreaking new technology or refining an existing system, the SR&ED tax incentive can play a crucial role in supporting your R&D journey.

Eligibility Criteria

Types of businesses that qualify for sr&ed.

The SR&ED program is open to a wide range of businesses operating in Canada. Whether you are a small-to-medium enterprise (SME), a large corporation, or even a startup, your business can potentially qualify for the SR&ED tax credit. Both private and public companies can apply, provided they meet the necessary criteria and are conducting eligible activities. Even foreign-owned companies operating in Canada may be able to access these credits for R&D conducted within the country.

Eligible Research and Development Activities

The SR&ED program places significant emphasis on activities that advance scientific knowledge or develop new technologies. Eligible activities generally fall into the categories of basic research, applied research, and experimental development.

• Basic Research: Research undertaken for the purpose of advancing scientific knowledge without a specific practical application in mind.
• Applied Research: Research aimed at solving a specific problem or creating new knowledge with a practical application.
• Experimental Development: Work done to achieve technological advancement for creating new products, processes, or improving existing ones.

For an activity to qualify, it must involve a systematic investigation or search carried out by qualified professionals, and the work should be aimed at resolving a technological uncertainty or achieving a technological advancement.

Industries that Benefit Most from SR&ED

While the SR&ED tax incentive is available to businesses across all sectors, certain industries tend to benefit more due to the nature of their work. High-tech sectors such as software development, pharmaceuticals, biotechnology, and manufacturing are well-positioned to take advantage of the SR&ED program, as R&D plays a critical role in their operations. However, other sectors, including agriculture, food processing, and even construction, can also leverage SR&ED credits for developing innovative solutions within their fields.

How the SR&ED Tax Credit Works

Refundable vs. non-refundable credits.

The SR&ED tax incentive provides both refundable and non-refundable credits, depending on the size of your business and the type of expenditures involved.

• Refundable Credits: Small and medium-sized Canadian-controlled private corporations (CCPCs) can claim refundable tax credits. This means that if the amount of the credit exceeds the business’s tax liability, the excess is refunded. For CCPCs, the federal refundable tax credit rate is 35% of qualified expenditures, up to a limit of $3 million.
• Non-Refundable Credits: Larger corporations, foreign-owned businesses, and some partnerships may only qualify for non-refundable credits. In this case, the SR&ED credit can be used to reduce taxes payable, but any excess credit cannot be refunded. The non-refundable federal tax credit rate is generally 15%.

Tax Credit Rates and How They Apply

The SR&ED tax credit rates vary based on several factors, including the type of business (e.g., CCPC, non-CCPC) and the amount of eligible R&D expenditures. CCPCs receive the highest rate for refundable credits, while non-CCPCs and other businesses receive lower rates for non-refundable credits. Here’s a breakdown:

• Canadian-Controlled Private Corporations (CCPCs): 35% refundable on the first $3 million of qualified expenditures and 15% non-refundable on any excess expenditures.
• Non-CCPCs (e.g., larger businesses, foreign-controlled corporations): 15% non-refundable tax credit on eligible R&D expenses.

Interaction with Provincial Tax Credits

One of the unique features of the SR&ED program is its interaction with provincial tax incentives. Many provinces in Canada offer additional credits that work in conjunction with the federal SR&ED credit, meaning businesses can often claim both federal and provincial credits for the same R&D expenses. For example, Quebec offers generous SR&ED tax incentives that complement the federal program, making the province particularly attractive for R&D-intensive industries.

Businesses operating in multiple provinces should be mindful of the differing rates and rules for provincial SR&ED credits. Maximizing both federal and provincial credits can significantly reduce the overall cost of R&D activities.

What Expenses Qualify for SR&ED Tax Credits?

Salary and wages.

The largest component of SR&ED claims typically comes from salary and wages paid to employees directly involved in eligible R&D activities. This includes engineers, scientists, developers, technicians, and other professionals working on research or development projects. Even support staff involved in SR&ED projects, such as project managers and supervisors, can have their wages included in the claim, provided their work is necessary for the R&D process.

It’s critical to maintain detailed records of the time employees spend on SR&ED-eligible activities, as the Canada Revenue Agency (CRA) may require documentation to support these claims. Timesheets, project logs, and detailed job descriptions can be crucial in justifying these expenditures.

Materials and Supplies

Costs related to materials and supplies that are consumed or transformed during the R&D process are also eligible for SR&ED credits. This includes raw materials used to develop prototypes or test new processes, as well as any supplies needed for conducting experiments. It’s important to note that materials that remain on hand after the project ends or are resold later do not qualify.

Overhead and Third-Party Contracts

Overhead costs related to R&D activities can also be claimed under SR&ED, provided they are directly tied to eligible projects. This might include utilities, rent for R&D facilities, and costs associated with maintaining lab spaces or specialized equipment.

In addition to in-house costs, third-party contracts for R&D services can be claimed. If your business contracts an external company to conduct SR&ED-eligible research on your behalf, those expenses can be included in your claim. However, it’s essential to ensure that the external work meets the same eligibility criteria as in-house research.

Case Study: A Real-Life Example of SR&ED-Eligible Expenses

Let’s consider a Canadian technology company working on a new software platform. Over the course of the development, the company incurs several types of expenses:

• Wages : Developers, engineers, and project managers working on the core platform are paid a total of $500,000 in salary and wages.
• Materials : The company spends $50,000 on specialized servers and development tools that are consumed during the software development process.
• Third-Party Contractors : An external R&D consulting firm is hired to provide technical expertise, costing $100,000.

In total, the company incurs $650,000 in SR&ED-eligible expenses. Based on these figures, the company could claim federal and provincial tax credits to significantly reduce its R&D costs.

How to Apply for SR&ED Tax Incentives

Step-by-step guide to filing an sr&ed claim.

• Identify Eligible Projects : The first step is to determine which projects qualify under the SR&ED guidelines. Ensure that the work involves systematic investigation, technological uncertainty, and advancement, as these are core elements of eligibility.
• Track SR&ED Expenses : Begin by organizing and documenting all eligible expenses, including wages, materials, overhead, and third-party contracts. Detailed records such as timesheets, purchase orders, invoices, and contracts will be critical for substantiating your claim.
• Complete Form T661 : Businesses must file Form T661 (Scientific Research and Experimental Development Expenditures Claim) along with their corporate tax return ( T2 ). This form provides detailed information about the nature of the R&D work, the technological challenges faced, and how the project meets the criteria for SR&ED.
• Prepare Financial Documentation : In addition to Form T661 , you will need to include Schedule T2SCH31 to report the amount of SR&ED investment tax credit (ITC) you are claiming. Ensure your financial statements and supporting documents are up-to-date and accurately reflect the SR&ED expenses.
• Submit Supporting Documentation : The CRA may request additional documentation to verify the claim. This could include technical reports, proof of technological uncertainty, project logs, and financial records. Be prepared to provide evidence of how the research activities meet the SR&ED criteria.
• File Your Claim with Your Tax Return : SR&ED claims are submitted with your corporate tax return ( T2 ) . Ensure all forms and schedules are completed accurately and on time. Typically, businesses have up to 18 months after the end of the fiscal year to file an SR&ED claim.

Required Documentation and Forms

• Form T661 : This is the primary form for detailing the R&D activities and associated expenses.
• Schedule T2SCH31 : This form reports the SR&ED investment tax credit (ITC).
• Financial Statements : You will need to provide accurate financial records detailing the eligible SR&ED expenditures.
• Supporting Documentation : Depending on your project, the CRA may require project plans, progress reports, experimental data, and other evidence of your R&D activities.

Common Mistakes to Avoid During the Filing Process

• Insufficient Documentation : One of the most common reasons for rejected or reduced SR&ED claims is a lack of supporting documentation. Ensure you keep comprehensive records of the entire R&D process, including project logs, timesheets, and technical reports.
• Misidentifying Eligible Activities : Not all research qualifies for SR&ED. Ensure that the work you are claiming truly involves technological advancement and uncertainty. Administrative tasks, marketing research, and routine data collection typically do not qualify.
• Missing Deadlines : SR&ED claims must be submitted within 18 months after the fiscal year-end. Missing this deadline means you forfeit the right to claim for that year, so stay on top of your filing schedule.

Common Challenges in SR&ED Claims

Understanding cra’s sr&ed review process.

The CRA conducts a detailed review of all SR&ED claims to ensure that the expenditures and activities meet the program’s criteria. This process often involves a Technical Reviewer and a Financial Reviewer :

• Technical Reviewer : This individual assesses whether the claimed activities meet the SR&ED program’s definition of R&D. They evaluate whether the project truly involved technological uncertainty and advancement. If your claim doesn’t adequately demonstrate these factors, it could be rejected or reduced.
• Financial Reviewer : This person focuses on the financial aspects of your claim. They verify that the reported expenses align with the eligible SR&ED categories, such as wages, materials, and overhead.

The CRA may ask for additional information or documentation during the review process. It’s important to respond promptly and provide any requested details to avoid delays or rejections.

Avoiding Common Pitfalls That Lead to Rejections

Many businesses make errors in their SR&ED claims that can result in partial or full rejections. Here are some common pitfalls to avoid:

• Vague Project Descriptions : When completing Form T661 , businesses often provide insufficient or overly general descriptions of their R&D activities. To avoid this, ensure that your descriptions are detailed, clearly explain the technological uncertainty, and highlight how your project aimed to achieve technological advancement.
• Inadequate Time Tracking : Failing to track employees’ time spent on SR&ED-eligible activities can lead to a reduction in wage claims. Make sure your staff accurately logs the hours spent on research and development activities to justify salary claims.
• Overclaiming Overhead Costs : Some businesses incorrectly allocate overhead expenses, such as rent or utilities, to SR&ED projects. It’s crucial to ensure that only overhead directly related to the R&D work is claimed, and this should be well documented.

Example Scenario: A Rejected Claim and How It Was Successfully Appealed

Imagine a Canadian biotechnology company that applied for SR&ED credits for developing a new drug delivery system. Their initial claim was rejected because the CRA’s Technical Reviewer determined that the project description lacked sufficient detail to demonstrate technological uncertainty.

Instead of accepting the rejection, the company gathered additional evidence. They provided more detailed experimental data, technical documentation, and clearer explanations of the technological challenges faced during development. After resubmitting the claim with this enhanced documentation, the CRA accepted the revised claim, allowing the company to secure the tax credits.

This scenario highlights the importance of being prepared to appeal and enhance your claim if needed. Proper documentation and clarity in your project’s technological uncertainty and advancement are key to a successful SR&ED claim.

Tips for Maximizing Your SR&ED Credits

Strategies for tracking and documenting r&d activities.

One of the most critical aspects of a successful SR&ED claim is meticulous documentation. The CRA requires businesses to provide evidence of both the technological uncertainty and the systematic investigation involved in their projects. Here are some best practices for keeping track of your R&D activities:

• Use Project Management Tools : Tools like Jira, Trello, or Asana can help organize and document research projects. These platforms enable you to track each stage of development, from ideation to experimentation, while keeping a clear record of the problems encountered and solutions attempted.
• Maintain Detailed Timesheets : Ensure that employees involved in SR&ED-eligible activities log their hours accurately. Timesheets should specify how much time was spent on research, development, testing, and other qualifying activities. These records are often requested by the CRA to substantiate wage claims.
• Keep Experimental Data : It’s essential to retain all experimental data and records, including lab notebooks, test results, and development logs. These documents demonstrate the technological challenges and the steps taken to overcome them, which are key to proving eligibility for SR&ED.

Leveraging Professional Advice (Accountants, SR&ED Consultants)

Hiring a professional with expertise in SR&ED can be an invaluable investment. SR&ED consultants and specialized tax accountants can help ensure your claims are both accurate and optimized. They can:

• Identify Eligible Expenses : Professionals familiar with SR&ED can help you identify qualifying activities and expenses that you might overlook.
• Prepare Documentation : An experienced SR&ED consultant can assist in preparing the necessary technical and financial documentation, ensuring that it meets CRA standards.
• Manage CRA Reviews : Should your claim be subject to review, consultants can help navigate the process and provide expert advice on how to respond to CRA inquiries.

How to Optimize SR&ED Credits Alongside Other Tax Incentives

Many businesses can benefit from combining SR&ED credits with other tax incentives to reduce overall R&D costs. Here’s how you can maximize your tax strategy:

• Use Provincial Tax Credits : In addition to federal SR&ED credits, most provinces offer their own R&D incentives. For example, Quebec provides enhanced tax credits for R&D, which can be claimed in conjunction with the federal SR&ED program. This approach can significantly boost your total credit.
• Look into Other Innovation Grants : Beyond SR&ED, there are various federal and provincial grants and funding programs designed to support innovation, such as the Industrial Research Assistance Program (IRAP) and Strategic Innovation Fund (SIF) . By strategically combining these programs, businesses can reduce R&D costs even further.
• Coordinate with the Accelerated Investment Incentive (AII) : The AII offers businesses the ability to deduct the cost of depreciable assets faster. If your R&D requires significant capital investments in equipment or technology, combining the AII with SR&ED credits can maximize your tax savings.

Provincial SR&ED Programs and Variations

Overview of different provincial sr&ed tax credits.

Each province in Canada has tailored its SR&ED program to suit local economic conditions and industry needs. Here’s an overview of some of the key provincial SR&ED tax credits:

• Ontario : Ontario offers two R&D tax credits: the Ontario Innovation Tax Credit (OITC) , a 10% refundable credit for small to medium-sized enterprises (SMEs), and the Ontario Research and Development Tax Credit (ORDTC) , a 3.5% non-refundable credit for larger corporations. Both credits can be combined with the federal SR&ED credit, allowing businesses to reduce R&D costs even further.
• Quebec : Quebec provides some of the most generous SR&ED tax incentives in Canada. The Quebec R&D Tax Credit offers refundable credits ranging from 14% to 30% depending on the type of business and R&D activities. This credit can significantly enhance the value of federal SR&ED credits for businesses operating in Quebec.
• British Columbia : BC offers a 10% refundable SR&ED tax credit for corporations engaged in eligible R&D activities. Businesses that do not have a sufficient tax liability to fully use the federal non-refundable credit can benefit from this provincial incentive.
• Alberta : Alberta’s Innovation Employment Grant (IEG) is designed to support early-stage and fast-growing companies. It offers a grant of up to 20% on incremental R&D spending, making it a valuable supplement to the SR&ED program for businesses in the province.

Differences in Rates and Rules by Province

The variation in rates and rules from province to province can have a substantial impact on the total tax credits a business is eligible to receive. For instance, Quebec’s higher credit rates and refundable options make it particularly attractive for startups and small businesses, while Ontario’s combination of refundable and non-refundable credits allows companies to optimize their tax strategy based on their size and profitability.

It’s important for businesses with operations in multiple provinces to carefully consider where they are performing their R&D activities. In some cases, relocating a project to a province with more favorable SR&ED rates could lead to significant savings. However, businesses should also take into account the cost of relocating and other potential incentives offered by local governments before making such decisions.

Case Study: Comparing Ontario’s and Quebec’s SR&ED Programs

Let’s look at a software development company operating in both Ontario and Quebec. The company incurs $500,000 in eligible SR&ED expenses in each province.

• In Ontario , the company qualifies for the Ontario Innovation Tax Credit (OITC) , receiving 10% of eligible expenses, or $50,000. Combined with the federal SR&ED tax credit (35% for CCPCs on the first $3 million), the company can claim a total of 45% on its R&D spending, resulting in $225,000 in credits.
• In Quebec , the same company qualifies for a refundable Quebec R&D Tax Credit of 30%, providing $150,000 in credits. When combined with the federal SR&ED credit, the total amount reaches 65%, allowing the company to claim $325,000 on its R&D expenditures.

In this example, the company gains an additional $100,000 by conducting its R&D activities in Quebec compared to Ontario. However, this decision would depend on other business factors, such as labor costs, access to talent, and market conditions in each province.

Real-Life Impact of the SR&ED Program

How sr&ed has helped companies grow and innovate.

Many Canadian businesses have used the SR&ED program to fuel their growth and technological development. Here are a few examples of how companies across various industries have leveraged the tax incentive to achieve innovation:

• Pharmaceutical Industry : A Montreal-based pharmaceutical company developed a new drug formulation aimed at treating rare diseases. The company’s R&D costs exceeded $10 million, but by utilizing the SR&ED program, it was able to recover a significant portion of its investment through both federal and provincial credits. This allowed the company to continue its research, eventually leading to the successful launch of a breakthrough treatment.
• Software Development : A Toronto startup working on artificial intelligence (AI) used SR&ED credits to fund its research into machine learning algorithms. The financial boost provided by the SR&ED program allowed the startup to hire additional engineers, accelerating product development. As a result, the company was able to launch its AI platform ahead of schedule, securing venture capital funding for further growth.
• Manufacturing : A Vancouver-based manufacturing firm redesigned its production process to improve efficiency and reduce waste. The company invested heavily in prototyping and testing new machinery, with costs running into millions. Through the SR&ED program, the firm received tax credits that significantly reduced the financial burden of its R&D efforts, allowing it to implement the new process and achieve substantial cost savings.

Case Studies from Canadian Businesses Benefiting from SR&ED

The SR&ED program has enabled numerous companies to innovate and grow. Here are two specific case studies demonstrating the impact of SR&ED:

• Case Study 1: A Small Tech Startup A small tech startup in Halifax was developing a new cybersecurity software. The company had limited funding and was heavily reliant on its R&D efforts to build the core product. By claiming SR&ED credits, the startup was able to recover over 40% of its R&D expenses. This financial relief allowed the company to continue development, eventually launching a successful product that secured several contracts with major clients.
• Case Study 2: An Agricultural Business An agricultural company in Saskatchewan was experimenting with new crop varieties to improve yield in harsh climates. The R&D required significant investment in field testing, equipment, and labor. Through the SR&ED program, the company claimed over $200,000 in tax credits, which helped fund additional research and refine their growing techniques. As a result, the company saw improved crop yields and expanded its operations to other provinces.

Long-Term Benefits for Canada’s Economy

The SR&ED program has long-term positive effects on both individual businesses and the Canadian economy as a whole. By encouraging investment in research and development, the program helps Canadian businesses stay competitive on a global scale, fostering technological advancement and improving productivity. Moreover, the SR&ED tax incentive supports job creation in high-tech sectors, attracting skilled professionals to work in research-intensive fields.

The ripple effects of the SR&ED program are felt across industries, as innovations in one sector often inspire breakthroughs in others. For example, advancements in AI technology can lead to improved manufacturing processes, while innovations in biotechnology may result in new healthcare treatments that benefit the entire population. By continuing to invest in R&D through the SR&ED program, Canada ensures its place as a leader in global innovation.

Frequently Asked Questions (FAQ)

What is the processing time for an sr&ed claim.

The processing time for SR&ED claims varies depending on the complexity of the claim and whether it is selected for review. Typically, claims are processed within 120 days for businesses that file electronically, but claims can take longer if additional documentation or reviews are required.

Can I apply for SR&ED if my project fails?

Yes, the SR&ED program allows you to claim tax credits even if the project does not result in a successful outcome. The key factor is whether the work involved technological uncertainty and systematic investigation. As long as your project meets the eligibility criteria, the outcome (success or failure) does not affect your ability to claim SR&ED tax credits.

What is the maximum credit a business can receive?

There is no explicit maximum limit on the amount of SR&ED tax credits a business can claim, but there are caps on the types of expenditures that qualify. For example, Canadian-Controlled Private Corporations (CCPCs) can claim refundable credits at a rate of 35% on the first $3 million in eligible expenses. However, larger companies and those exceeding this limit can still claim non-refundable credits at lower rates. In addition, businesses can also leverage provincial tax credits to further increase the total amount of credits received.

What happens if the CRA rejects my SR&ED claim?

If your SR&ED claim is rejected, you can appeal the decision. The first step is to review the CRA’s reasons for rejection and address any issues raised. In some cases, providing additional documentation or clarifying your project’s details can resolve the problem. If the appeal process does not lead to a resolution, you may choose to escalate the issue by appealing to the Tax Court of Canada .

Do I need a consultant to file my SR&ED claim?

While it is not mandatory to hire an SR&ED consultant, many businesses find it beneficial, especially if they are new to the program or have complex R&D activities. Consultants can help identify eligible expenses, prepare the necessary documentation, and navigate the CRA review process. However, smaller businesses with straightforward claims may be able to file independently by carefully following the CRA’s guidelines.

Can I claim SR&ED for work conducted outside of Canada?

No, SR&ED tax credits are only available for R&D activities conducted within Canada. Expenses related to R&D performed outside the country do not qualify for the SR&ED program. However, companies can claim SR&ED credits for R&D work done by third-party contractors as long as the work occurs in Canada.

How long can I claim SR&ED tax credits for an ongoing project?

As long as your project continues to involve eligible R&D activities, you can claim SR&ED tax credits for each tax year in which qualifying expenses are incurred. Some businesses work on multi-year projects and submit SR&ED claims annually. The key is to ensure that the project still meets the SR&ED criteria for technological advancement and uncertainty each year.

How does SR&ED interact with other government programs?

SR&ED can be combined with other government funding programs, such as the Industrial Research Assistance Program (IRAP) or provincial R&D grants. However, businesses need to be careful about “double-dipping,” as some programs may reduce the SR&ED claimable amount. It’s essential to review the specific guidelines of each program to ensure compliance.

Related Articles

Estate Freezes: A Tax Strategy for Business Owners

A Guide to the Tax-Free Savings Account (TFSA)

Taxation on Child’s Income from Trusts or Investments

Subscribe to our newsletter, thank you for sign up, merci pour votre inscription .

2024 Terms & Conditions | Privacy Policy | Copyright TaxTool.ca

A Guide On Scientific Research And Experimental Development (SR&ED) Tax Credits

Contributor.

If your business engages in research and technological advancements, it may qualify for tax credit incentives from the Scientific Research and Experimental Development Program.

Annually, the Scientific Research and Experimental Development Program disburses over $3 billion in tax incentives to more than 20,000 claimants. This program was implemented to help fuel innovation in Canada through providing significant tax benefits to those who engage in research and development. In fact, it is the largest program administered by the Canada Revenue Agency to support and reward businesses conducting research and development in Canada. This guide will provide you with the essential information that you need to know about the program to determine if you qualify and how to apply.

What is the Scientific Research and Experimental Development Program?

The Scientific Research and Experimental Development Program provides investment tax credits and expense deductions to businesses for eligible expenditures related to the scientific research and experimental development they are engaging in. These expenditures may include wages, materials, equipment, and overhead costs.

Eligibility

To qualify for Scientific Research and Experimental Development tax credits, all research and development for which a claim is made must take place in Canada. Sole-proprietorships, corporations, partnerships, and trusts are all eligible for the program. However, Canadian-controlled private corporations receive additional advantages, such as being able to claim an investment tax credit rate of 35% for up to three million dollars of eligible expenditures and 15% for any additional eligible expenditures.

All work for which expenditures are being claimed must be done for the advancement of scientific knowledge or for the purpose of achieving a technological advancement. The work that the claim is related to must also be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.

Work that is eligible for the program includes:

• Basic Research, which is done to advance scientific knowledge without a practical application in view;
• Applied Research, which is done to advance scientific knowledge with a practical application in view;
• Experimental Development, which is done to generate or discover technical knowledge or know-how in order to develop or improve materials, devices, products, or processes, including incremental improvement;
• Support Work, which is related to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, and directly supports the needs of the basic research, applied research, or experimental development work being done.

Work that is not eligible for the program includes:

• Market research or sales promotions;
• Quality control or routine testing;
• Social sciences or humanities research;
• Style changes;
• Routine data collection;
• Commercial production of a new or improved material, device, or product;
• Commercial use of a new or improved process;
• Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas.

Making Claim

In order to claim Scientific Research and Experimental Development tax credits, you must apply within eighteen months from the end of the tax year in which eligible expenditures were incurred. To submit your claim, you must identify and describe all work that is eligible, calculate all eligible expenditures, and keep supporting documentation to substantiate your claim.

Once your claim has been approved, your Scientific Research and Experimental Development tax credits may be refunded to you, used to reduce your taxes payable, or carry them forward for up to twenty years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.