What is SR&ED?
The Scientific Research and Experimental Development (SR&ED) Program, often pronounced “shred”, is a federal tax incentive that encourages businesses to do research and development (R&D) work in Canada. The SR&ED is overseen by the Canada Revenue Agency (CRA), which issues over $6 billion in tax credits annually for qualified R&D work.
How Do SR&ED Tax Credits Work?
SR&ED credits come in the form of refundable and non-refundable tax credits on expenditures for scientific R&D. To apply, you must complete Form T661. This form will help you prepare the technical reports that will be required to substantiate your SR&ED claim.
If the SR&ED schedules and forms are incorrectly completed, the CRA may deny your claim.
This error is one of the leading reasons SR&ED claims are denied; therefore, it is important you work with an accounting firm that is well-versed in this area. Our team at SRJCA brings proven, successful experience in putting together SR&ED claims that recover most of your R&D costs.
Am I Eligible for SR&ED Tax Credits?
Canadian individuals, businesses of all sizes, corporations, and others can qualify for the SR&ED. If you have developed a new product or improved an existing product, you might qualify as well!
If you answer “yes” to any of the following, you could be eligible for SR&ED credits:
- Does your project have technological uncertainties?
- Does your project offer technological advancements?
- Does your research result in scientific or technical content?
How Do I Calculate the SR&ED Tax Credit?
Your investment tax credit could be at the low end of 15%, potentially, as high as 35% of your qualified SR&ED expenditures based on the eligible R&D your business is conducting.
There are a number of other factors that go into calculating your SR&ED tax credit, including the type of expenses incurred and amount of time spent on the project.
You have two calculation methods are your disposal:
The traditional method will require you to itemize your overhead and related expenditures.
This is a simplified method that allows you to claim 55% of salaries and wages for employees who are directly involved in your SR&ED-qualified work.
How Do I Claim the SR&ED Tax Credit?
In order to claim your SR&ED tax incentive, you must complete Form T661 and other Schedules which outline the work you completed in the year. While submitting Form T661, you must submit your other federal forms with your income tax return. There may also be provincial forms too.
Overall, your return forms must satisfy the following criteria:
- Technological Uncertainties
- Technological Advancements
- Scientific or Technical Content
- Gather Proof of Documentation Supporting Your SR&ED Claim Activities
Deadlines vary. For corporations, it is 18 months, and for individuals, it is 17-and-a-half months.
Are SR&ED Tax Credits Only Available to Certain Industries?
SR&ED tax credits are not specific to certain industries. However, there are industries that are generally likelier to qualify for the credit, such as:
- Natural and formal sciences, including physics and chemical studies
- Engineering and technology development, including civil and mechanical engineering
- Medical and health sciences, including basic medicine and clinical medicine
- Agricultural sciences, including animal science, dairy science, and biotechnology
- Software development, including software startups.
What Expenditures are SR&ED Eligible?
The following kinds of expenditure are eligible under the SR&ED:
- Salary or wages
- Contractor costs
- Materials consumed or transformed
What Expenditures are NOT Eligible?
If your project does not meet the definition of SR&ED in subsection 248(1) of the Income Tax Act, it is ineligible.
Examples of ineligible expenditures can include marketing, administration, and sales expenses related to the project because they are not related to the development of the project itself.
If My Company is Not Profitable and is Not Paying Tax Yet, is it Still Eligible for the SR&ED Tax Credit?
Your business does not need to be earning revenue or be profitable to apply for the SR&ED tax credit in Canada.
If your corporation is a Canadian-Controlled-Private-Corporation (CCPC), it is eligible for a refundable SR&ED tax credit. Other types of corporations can also earn a non-refundable tax credit, which can be applied to income taxes.
How Long Will it Take to Process Our SR&ED Claim?
The CRA promises to deliver a service standard of 90% and process claims within 60 calendar days of being received. But if your file is chosen for review, it can take up to 180 calendar days.
How Much Money Will We Get from SR&D Tax Credits?
If you are a CCPC, you can receive 35% of the qualified SR&ED expenditures, which caps out at $3,000,000. This is refundable or can be applied to taxes owing.
However, if you are not a CCPC, then you have a basic rate of 15% of SR&ED expenditures that qualify. This amount will be applied to taxes owing.
Is the SR&ED Refund Taxable?
How Much Will This Process Cost Us?
Generally, SR&ED claims are contingency based. This means that if your claim is not successful you do not pay.
Our fees can range from 15% of the benefit received for large claims to 25% of the total benefit for smaller claims.
The fee includes translating your project’s technical details to a language the CRA understands, determining the amounts to claim, assisting with documentation, and coordinating with the CRA in case of a review.
Are SR&ED Tax Credits Part of a Government Grant Program?
Yes, the SR&ED is a federal tax incentive program administered by the CRA available to businesses in all industries and of all sizes that undertake R&D work in Canada.
How and When Do We Know if We Qualify?
The CRA will assign technology advisors and financial reviewers to examine your SR&ED claim.
The technology advisors will assess whether your project qualifies under the SR&ED and the financial reviewer will look to see if the costs you claimed for the work are allowable.
You may also get a visit by the CRA reviewers, who will then speak to your technical and financial staff and review your documentation and other supporting evidence.
Are Companies in the US Eligible to Apply for the SR&ED?
There are several methods of US-based companies for applying for the SR&ED:
- Establishing a Canadian Subsidiary
- Establishing a CCPC
- Canadians Abroad
The amount that you can claim varies between each option, so the best starting point would be to speak to a specialist at SRJCA who has successfully filed each of these.
Is Our Work Eligible if There is Already a Similar Product to Ours on the Market?
It depends. Since the program focuses on development, your product may be built or tailored to suit your specific needs. A good question to ask is, “is what I’m developing available in an open source format?”
If your answer is “no”, then you may qualify.
If your answer is “yes”, then you are unlikely to qualify.
What is the Deadline for Submitting an SR&ED Claim? How Long Do We Have Before We Can Apply?
Your deadline will depend on your tax filing type.
Individuals with a Business Tax Filing: you have 17.5 months from the calendar year-end. So based on December 31, 2018, you have until June 15, 2020.
Corporate Tax Filings: you have 18 months from when your year ends. For example, if your year ends on June 30, 2018, then you have until December 31, 2019 to file.
Trust Tax Filings: you have 15 months from where your year ends. If your year ends on June 30, 2018, you have until September 30, 2019.
If your deadline falls on a weekend or statutory holiday, it will be pushed to the following business day.