If you operate a business in Canada that conducts research and development, you potentially are eligible to receive income tax benefits related to the money you spent on R&D. (Yes, this means you potentially could pay less in business taxes. You’re welcome!)
This program, called the Scientific Research and Experimental Development program, or SR&ED, is available to businesses of all sizes. You could be operating a business in almost any industry sector and be eligible for SR&ED as well. You don’t necessarily have to work in a high-tech sector to perform research that fits under SR&ED.
Understanding whether you qualify for this SR&ED tax credit can be a little confusing. We’ll break down all the information you need to know about the SR&ED program to help you determine whether this program is something you may want to try to use.
What Is the SR&ED Tax Credit?
When you have involvement in eligible SR&ED research and development work, you can use the tax credit to claim SR&ED expenditures and to reduce your tax bill.
The SR&ED tax credit can be a deduction against your business income. It can be an investment tax credit, or ITC, that potentially can offset your business income tax bill. You may even be able to receive a cash back payment through SR&ED.
You can claim ITCs equal to between 15 percent and 35 percent of your qualified SR&ED expenditures. Should you have more ITCs than you can use in a single tax year, you can potentially use the ITCs retroactively up to three tax years in the past (and refile your taxes) or use them up to 20 tax years in the future.
If you use an accountant or CPA to complete your income taxes, be sure to mention that you may have SR&ED tax credits available. The tax preparer should be able to help you figure out the most advantageous way to use them to offset tax payments.
What Does SR&ED Stand for?
SR&ED is short for Scientific Research and Experimental Development. The Canadian tax regulations initially mentioned scientific research expenditures as a potential way to offset tax payments as early as 1963, so this idea has existed for a long time.
How Does SR&ED Work?
The SR&ED tax credit program allows companies to receive a cash refund or a reduction in taxes owed through qualifying research and development work. If you qualify, your business would receive tax credits on expenditures related to the R&D work you are doing.
Some of the items you can claim as part of an SR&ED tax credit include:
In the past, you were eligible to use SR&ED credits on equipment purchases used for R&D purposes. However, equipment is no longer eligible (although you can potentially use depreciation on the equipment to reduce your business tax bill).
Either foreign-controlled businesses operating in Canada or Canadian-controlled businesses can use SR&ED.
Over the decades, the definition of SR&ED qualifications changed several times. The most recent definition defines these qualifications as:
Ultimately, such research becomes eligible for a tax credit because it often benefits society as a whole. Because taxpayers may receive a benefit from the advancements that occur because of the research and development, the government decided costs required to perform the R&D can become eligible for tax breaks.
Success or failure of the work is not a factor in determining the eligibility of an SR&ED project for ITCs.
SR&ED Eligible and Ineligible Expenditures
Determining whether your R&D work is eligible for tax credits under SR&ED seems like a straightforward process. After all, the government has lists of items considered eligible for SR&ED credits and those considered ineligible.
Work that is creating conceptual knowledge, like theories, is often eligible for SR&ED. Work that only involves collecting factual knowledge, like measurements, typically is not eligible.
Another part of the way to determine whether a particular type of research work is eligible is to apply the “how” and “why” test.
Here are some examples of items that typically are eligible and ineligible for SR&ED.
Expenditure Items Eligible for SR&ED
Expenditure Items Ineligible for SR&ED
Understand that there are some gray areas within these lists and definitions. You may want to consult with an accountant or a CPA to precisely determine whether some of the R&D work you are doing is eligible.
Make Use of SALT
Additionally, you can use the SR&ED Self-Assessment and Learning Tool, or SALT, to help you understand whether your work qualifies for tax incentives under SR&ED. SALT even can help you estimate the amount of tax credits you may be eligible to receive.
By completing SALT, you also can figure out which information and records you need to submit your claim successfully. Think of SALT as a test run to determine how to successfully apply for SR&ED tax credits.
SR&ED Tax Credit Calculation
Depending on whether you are a foreign-controlled or a Canadian-controlled business or corporation, the calculation of the benefits you can receive from the SR&ED tax credit will differ.
An example from R&D Partners showing SR&ED maximum tax credit rates for a company that has $5 million in SR&ED expenditures involves the following amounts.
The application process for SR&ED ITCs can seem quite complex, especially for first-time applicants. Make use of SALT, as we described earlier, to ensure you are eligible for the tax credits and to make certain you have all the information you need to apply.
Understand that you can receive federal tax credits as well as provincial tax credits in Ontario related to SR&ED. The steps you should follow before beginning the application process include:
Below we provide quick answers to common-asked questions about the SR&ED (Scientific Research and Experimental Development) program.