The Scientific Research & Experimental Development (SR&ED) program is a tax incentive through the Canadian government which allows a company to earn tax credits on certain expenditures within their daily operations.
Sounds pretty good, right? It is, but there are specific criteria you must meet to benefit from it. You may have heard of the program but don’t understand how it can benefit your company.
Understanding SR&ED tax incentive funding is tough. As with any tax preparations and filings, working with tax professionals is the best way to maximize your eligible expenses and get the best returns.
So, how does SR&ED funding work? Let’s learn more about SR&ED.
Tax Credit Program
The Canadian Revenue Agency and provincial partners provide funding to encourage companies to conduct research and development within their sector. This government program started in 1985 with the idea of stimulating innovation and initiative and is delivered through CRA. Now it is the biggest source of financial support from the Canadian government.
Through the tax incentive, big and small businesses can reduce their tax liability in the current or future years. There are three forms this incentive comes in:
- Income tax reduction
- Tax credit
- Cash refund
SR&ED
Is SR&ED the same as R&D? While research and development is a catch-all for any activity to gain and use knowledge, it is more focused on improving a product. This could be through applying various enhancements available in the marketplace or testing different existing industry methods.
SE&ED goes in a more innovative direction by developing new methods. Through experimentation and testing, you overcome technological limitations and create processes to help further your design and operation.
Ideally, you should work with a professional consultant who has experience with this type of SR&ED program. They will advise and assist with proper filing within the timeframe to get all you are eligible for. Let them take care of the paperwork so you can get back to innovating and bringing new technology to the marketplace. This is what Canadian companies do best.
SR&ED Eligibility
Who is eligible for the SR&ED tax credit? Any company that operates in Canada, whether foreign-controlled or Canadian-controlled, can submit qualified expenditures to earn tax credits. They must be performing eligible research and development to improve existing products and processes or create new ones.
Here are the activities you need to do to qualify. Either:
- Basic Research: This is when you are working to advance scientific knowledge without a specific, practical application.
- Applied Research: When there is a specific and practical application in mind and research is done to advance scientific knowledge.
- Experimental Development: You are working on achieving technological development through experimentation.
Any work supporting these three activities is also eligible for the tax credit. Most eligible work generally falls under the experimental development activity.
Additional prerequisites:
- 90% of the work being claimed must be performed in Canada.
- Any claim must be for the SR&ED work or projects.
- Any salary, material or subcontractor expenses must be related to the claimed work.
- Subcontractor and salary expenses must only be paid to a Canadian entity with a SIN or BN.
Type of Work
To claim the tax incentive, qualifying work must be performed. This is generally defined as the experimentation through trial and error to work through a technological uncertainty. It can involve systematic investigation and prototyping, working through obstacles and striving to resolve projects that have failed.
There is technical uncertainty, and by using a systematic approach, you attempt a technological advancement and produce work supported by evidence and being done by qualified workers. Projects can include:
- Technical issues
- Consulting studies
- Development and improvement of processes and products
- Existing technologies that have new applications
- Budget overruns
- Capital spends
- Old and new technology integration
Making a SR&ED Claim
With regular corporate tax filings, you must submit your claim six months after your fiscal year-end. For SR&ED reports, they are due within 12 months afterwards or a total of 18 months after year-end. These are for the year in which you incurred R&D expenditures.
These credits can be used to offset payable taxes, refunded as cash or carried forward for up to 20 years.
CRA processes claim they are accepted within 60 days after receiving them. It will be performed within 180 days if they are put under review. CRA uses a screening process to determine if they can process the claim or send it for review. A technical reviewer will check if the claim meets SR&ED eligibility, and a financial reviewer will examine the costs associated the determine if they are allowable. Once it is completed, you will get a notice of assessment.
