Are you aware that Canadian government refunds over three billion dollars every year to Canadian taxpayers through the SR&ED Program?
The Scientific Research & Experimental Development (SR&ED) Tax Incentive Program began in 1944 with the aim of stimulating the Canadian economy by incentivizing research and development within the country. Rules governing the program are contained in the Canadian Income Tax Act. The only method of applying for the program is through your company’s income tax return.
SR&ED incentives are often paid by means of a cash refund, but depending on circumstances it may also be paid in the form of an income tax reduction. Canadian‑controlled private corporations (CCPCs), other corporations, proprietorships, partnerships, and trusts are eligible to apply for the program.
Many are surprised to find out that almost every industry in Canada is conducting work that is eligible for SR&ED incentives. The definitions in subsection 248(1) of the Income Tax Act are quite broad and does not mention any specific industry. It can therefore be concluded that SR&ED credits are not generally restricted to certain industries or professions.
There are however a few exceptions from the program, some of which ineligible activities are listed below:
- Market Research
- Research in social sciences or the humanities
- Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas
In short, an eligible activity for SR&ED is any activity wherein you learned something about technology that was not generally accessible to you. In other words, you learned something during your work that you were not able to find in a textbook or online.
Eligible activities can include manufacturing, design, engineering, experimentation, software development and other activities that result in an acquisition of knowledge. If a company is learning and not claiming for SR&ED, they are leaving money on the table.
The Income Tax Act subsection 248(1) states three categories of eligible activities:
“(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,”
Applied research” and “experimental development” most often applies to work done by for-profit corporations, whilst “Basic research” applies mainly to academia.
A common myth is that you may not profit from work that is claimed for under the SR&ED program. That is false, as (b) states that there is a “specific practical application” which very well may be a business application.
There is also a provision which allows activity in support of eligible activities to be claimed. These are activities that may not be eligible on its own merit, but was necessary to facilitate the eligible work. The Income Tax Act states the following:
“(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,”
There is another myth that “routine work” is always ineligible. This is false, as the work described above such as computer programming and data collection may both be considered routine, but in this case they are deemed eligible to claim.
The following are the only claimable expenses:
- Payroll (T4 salaried employees)
- Overhead expenditures
- Contractor Invoices
- Wasted Materials
Expenses such as management fees, dividends and bonuses (unless stated as payroll) are not claimable for SR&ED.
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