SR&ED
The Scientific Research & Experimental Development (aka SR&ED, “shred”, or “sred”) program is Canada’s largest tax incentive program. Providing over $4 Billion in funding per year, it is designed to encourage businesses to carry out their research and/or development (R&D) in Canada. Over 22,000 companies receive SR&ED funding each year. Of these, about 75% are small businesses (annual revenue <$5 Million). However, all businesses who perform work in Canada, from sole proprietorships to multi-national corporations, are eligible for SR&ED funding.
As the name implies, the SR&ED program has two separate components: the Scientific Research component, and the Experimental Development component. Each has different eligibility and claiming criteria. Generally, work performed will meet the criteria of one or the other, not both. It may seem counter-intuitive, but work never has to meet the criteria of both Scientific Research & Experimental Development. The majority of claims and funding provided are for businesses engaging in Experimental Development alone.
It is important to note that what is eligible under SR&ED is usually much more broad than what most typically think of as R&D. SR&ED has very specific eligibility criteria, but these criteria apply quite broadly to the ‘day to day’ work performed by most companies. The most common mistake made when filing for SR&ED is underestimating eligibility. Whether that be a failure to identify types of work as eligible, or mistakenly omitting the work which is otherwise ineligible, but is done in support of the SR&ED work, and is therefore eligible itself. It is not uncommon for a business to underestimate their eligibility by a factor of 5 – 10x.
The SR&ED program has been managed by the Canada Revenue Agency since the 1980’s. SR&ED funding is not applied for and is not approved or denied by CRA. Rather, the eligible expenses, and required supporting documentation, are reported within the Corporate T2 tax form. If the work meets the eligibility criteria outlined in the Tax Code, and the supporting documentation is appropriately completed, the funding is guaranteed by law. SR&ED funds are provided as Investment Tax Credits (ITC). Depending on your corporate structure, these ITCs may be pooled and used to offset current and future taxes owing, or, if you are a Canadian Controlled Private Corporation, fully refunded in cash each year.
The SR&ED program is vast, both in its scale and its complexity. It is difficult to fully grasp the program and how it may benefit one’s company through reading alone. While we have made available information which is specifically targeted for companies performing Development, often the easiest way to find out how SR&ED can be of benefit is to arrange a brief meeting over coffee with one of our SR&ED experts.
