The Scientific Research and Experimental Development (SR&ED) Program is a federal tax incentive program, administered by the Canada Revenue Agency (CRA), that encourages Canadian businesses of all sizes, and in all sectors to conduct research and development (R&D) in Canada. It is the largest single source of federal government support for industrial R&D.
The SR&ED Program gives claimants cash refunds and / or tax credits for their expenditures on eligible R&D work done in Canada.
Qualified Work entails developing a new process or product in Canada by Canadian employees or contractors.
The process must have technological uncertainty and must be solved through experimentation.
Click here for a glossary of SR&ED terms.
All industries can avail of this program but in general we find SR&ED mostly in:
- Software/IT/Gaming
- Advanced Manufacturing
- Agri-food, Food Processing
- Bio-tech
SR&ED is monetized through Investment Tax Credits (ITC)
ITCs are refundable or non-refundable and depend on the size and profitability of your company. In general, the larger and more profitable (taxable income > $500K) you are the less likely you are qualified for refundable tax credits. Also, non-Canadian controlled private corporations (public companies, foreign owned) do not qualify for refundable investment tax credits.
Example: Employee Labour Costs
| Type of Company | High Rate Refundable (41.5%) | Low Rate Non-Refundable (23.5%) |
| Salary | 100,000 | 100,000 |
| Proxy (overhead) | 55,000 | 55,000 |
| Total SR&ED Expenditures | 155,000 | 155,000 |
| Tax Credit Rate - combined Federal & Provincial (BC) | 41.5% | 23.5% |
| ITC | 64,325 | 36,425 |
Example: Contractor Labour Costs
| Type of Company | High Rate Refundable (41.5%) | Low Rate Non-Refundable (23.5%) |
| (Sub) Contractor Costs | 100,000 | 100,000 |
| Reduction in Expenses (-20%) | (20,000) | (20,000) |
| Total SR&ED Expenditures | 80,000 | 80,000 |
| Tax Credit Rate - combined Federal & Provincial (BC) | 41.5% | 23.5% |
| ITC | 33,200 | 18,800 |
Notes:
- Labour only applies to work that is considered directly engaged SR&ED. This does not include non-SR&ED (marketing, sales, routine technical support).
- Eligible contractors and labour only apply to Canadian taxable suppliers, employees, respectively.
- Generally speaking, eligible work entails technical people doing technical things not sales, marketing or business related matters.
Filing Process
SR&ED claims are normally filed with your year end corporate taxes (T2)
They can be amended (filed separately) or filed together.
You have up to 18 months past your year end to file a SR&ED claim. For example:
- Tax Year Ended: December 31, 2013
- SR&ED Filing Deadline: June 30, 2015
Claims are sent to the local Tax Services Center and processed by a specialized SR&ED division at the Canada Revenue Agency staffed by technical (science) and financial auditors.
The normal processing times are anywhere between 2-6 months if there is no audit. Audits can extend the final processing of a claim for up to 2 years for highly contentious claims.