SR&ED Guide: Plain English Guide for Business Owners -

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:

Wages for those doing the R&D
Materials used during the research
Fees for using subcontractors to perform the research
Overhead costs related to the research

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.

SR&ED Eligibility

Over the decades, the definition of SR&ED qualifications changed several times. The most recent definition defines these qualifications as:

Investigation or research occurring in a field of science or technology.
Work undertaken for advancing scientific knowledge that doesn’t necessarily have to have a specific application in mind (although it can).
Experimental research done to make incremental improvements to existing technology, products, processes, or materials or to develop new products or technology.

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.

When to Claim SR&ED

It’s also important to understand the definitions of the start, duration, and completion of the SR&ED project to ensure you submit the SR&ED forms at the correct time.

Start: The start of an SR&ED project occurs when you identify a scientific or technological area of uncertainty, and you take steps to attempt to resolve this uncertainty.
Duration: The duration of the project has no bearing on whether the SR&ED project is eligible for tax credits. Some projects last a short period of time, while others are quite long, maybe a year or more.
Completion: Once you gain the scientific knowledge you were seeking and you obtain your objective, the project is complete. The project also may come to an end when you decide to abandon any further research because of a lack of progress. You are able to seek tax credits at this point.

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.

Why: You must have a clear understanding of why you are performing the R&D. If it is not being done to aid in the advancement of scientific knowledge or in creating technological advancement, it probably won’t fit under the “why” test.
How: The “how” test involves how you are doing the research work. It should involve a systematic investigation through experiments or analysis in a field of science or technology.

SR&ED Examples

Here are some examples of items that typically are eligible and ineligible for SR&ED.

Expenditure Items Eligible for SR&ED

Work involving basic research
Experimental development work
Research related to design
Research related to mathematical analysis
Research related to data collection that does not occur routinely
Psychological research

Work involving applied research
Research related to engineering
Research related to operations
Research related to computer programming
Research related to testing

Expenditure Items Ineligible for SR&ED

Market research
Sales promotion
Quality control
Routine materials testing
Routine testing of processes
Researching social sciences or humanities

Prospecting for minerals, petroleum, or natural gas
Commercial production for a new product
Data collection that occurs routinely

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.

Canadian-Controlled Corporation

First $3 million of expenditures: 35 percent credit rate available that is 100 percent refundable, resulting in $1.05 million in cash back.
Remaining $2 million of expenditures: 15 percent credit rate available that is 40 percent refundable, resulting in $120,000 in cash back and $180,000 in reduced taxes.

Foreign-Controlled Corporation

First $3 million of expenditures: 15 percent credit rate available that reduces taxes by $450,000.
Remaining $2 million of expenditures: 15 percent credit rate available that reduces taxes by $300,000.

SR&ED Application

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:

Determine the eligibility of the kinds of R&D work that you did
Collect any technical documents that prove the work you did
Collect any financial documents that prove the expenditures you are claiming
Calculate your qualified expenditures for SR&ED
Calculate your ITCs, based on your expenditures

SR&ED Forms

Forms required to claim your tax credits include the following. (Understand that not all these forms may apply to your situation.)

Form T661 SR&ED Expenditures Claim for corporations
Schedule T2SCH31 ITC for corporations
Form T661 SR&ED Expenditures Claim for individuals
Form T2038(IND) ITC for individuals

First-Time Applicants

If you are applying for SR&ED credits for the first time, you may be eligible to receive specific help from the Canada Revenue Agency, or CRA, related to the filing process. If you believe you are eligible for this help, you can request a pre-claim consultation.

You also can contact your local tax services office from the CRA to seek additional help. In Ontario, this is the Greater Toronto Area West Tax Services Office.

SR&ED FAQs

Below we provide quick answers to common-asked questions about the SR&ED (Scientific Research and Experimental Development) program.

The SR&ED (Scientific Research and Experimental Development) program is offered by the Canadian government and provides tax incentives for businesses that conduct research and development (R&D) activities.

To be eligible for SR&ED, the R&D activities must meet the following criteria:

Scientific or technological uncertainty: The work must involve scientific or technological uncertainty that cannot be easily resolved by a competent professional in the field.
Systematic investigation or search: The work must involve a systematic investigation or search that is carried out by qualified personnel.
Advancement of knowledge: The work must be intended to create new knowledge, improve existing knowledge, or resolve scientific or technological uncertainty.
Experimental or iterative process: The work must involve an experimental or iterative process that includes testing, analyzing, and modifying hypotheses.
Technological content: The work must have technological content, which means that it must relate to the engineering, physical, or computer sciences.

Eligible SR&ED expenditures include salaries and wages, materials, subcontractors, and overhead costs related to conducting SR&ED activities. The expenses must be directly related to the SR&ED work and must be reasonable in the circumstances.

To calculate the SR&ED tax credit, you can follow these steps:

Determine your eligible SR&ED expenditures: The first step is to determine the eligible expenditures that can be claimed for the SR&ED tax credit. Eligible expenditures include salaries and wages, materials, subcontractors, and overhead costs related to conducting SR&ED activities.
Calculate your SR&ED investment tax credit (ITC): Once you have determined your eligible expenditures, you can calculate your SR&ED investment tax credit (ITC). The federal SR&ED ITC is calculated at a rate of 15% on the first $3 million of eligible expenditures and 5% on any excess amount. Some provinces and territories offer additional ITCs on eligible expenditures, so be sure to check if your business is eligible for any of these additional credits.
Calculate your SR&ED enhanced investment tax credit (EITC): The SR&ED EITC is an additional tax credit that can be claimed on qualified expenditures related to Canadian-controlled private corporations (CCPCs). The EITC is calculated at a rate of 35% on the first $3 million of eligible expenditures.
Apply your SR&ED tax credits to your tax liability: Once you have calculated your SR&ED ITC and EITC, you can apply these credits to your tax liability. The SR&ED tax credits can be applied against federal and provincial or territorial income tax.

To file a SR&ED claim in Canada, you need to follow these steps:

Determine if your work is eligible for the SR&ED program: The SR&ED program provides tax incentives for Canadian businesses that conduct research and development activities. The work must meet certain criteria to be eligible, including:
- Being conducted in Canada
- Advancing scientific or technological knowledge
- Involving the resolution of technological or scientific uncertainty
Keep detailed records of your SR&ED activities: It’s important to keep accurate and detailed records of your SR&ED activities and expenditures. This includes lab notes, project plans, employee timesheets, supplier invoices, and other relevant documentation.
Complete Form T661: To claim the SR&ED tax credit, you need to complete Form T661. This form asks for information about your SR&ED activities, expenditures, and outcomes.
Submit your claim to the CRA: Once you have completed Form T661, you need to submit it to the CRA along with your tax return. It’s recommended that you file your claim as soon as possible after the end of the fiscal year, as the CRA may request additional information or documentation.
Respond to CRA inquiries: The CRA may review your SR&ED claim and request additional information or documentation. It’s important to respond to these inquiries promptly and provide the requested information to avoid delays in processing your claim.

When you receive a Scientific Research and Experimental Development (SR&ED) tax credit refund, you need to record it in your accounting records. Here’s how to do it:

Record the SR&ED refund as income: The SR&ED refund is considered taxable income and should be recorded as such in your accounting records. Depending on your accounting system, you may need to create a new income account or use an existing one.
Allocate the SR&ED refund to the appropriate period: The SR&ED refund should be allocated to the period in which the related expenses were incurred. For example, if you received a refund for SR&ED expenses incurred in 2021, the refund should be allocated to the 2021 fiscal year.
Reverse any previously claimed SR&ED expenses: If you claimed SR&ED expenses in previous fiscal years and received a tax credit for them, you may need to reverse those expenses if they were included in the calculation of your taxable income. This will ensure that you do not claim the same expenses twice and avoid any potential issues with the Canada Revenue Agency (CRA).
Adjust your tax payable account: The SR&ED refund will affect your tax payable account, which should be adjusted accordingly. If the refund is greater than the amount owing, you will have a credit balance in your tax payable account, which can be applied to future tax liabilities.

We strongly advise that you speak with an accountant who has SR&ED experience, as the SR&ED is a complicated tax incentive.

SR&ED Guide: Plain English Guide for Business Owners