SR&ED credits relate to the Scientific Research and Experimental Development Tax Incentive Program. These credits are designed to support businesses conducting research and development in Canada. This is done through tax incentives and is available to Canadian companies of all sizes.
In all sectors engaged in domestic R&D. The program is responsible for providing over $3 billion in tax incentives to more than 20,000 claimants every year, as administered by the Canada Revenue Agency.
SR&ED was designed to help support economic growth and competitiveness in Canada. The program helps by facilitating innovation, supporting technological advancements, and funding the pursuit of discoveries in science and tech. Tax incentives, also known as a SR&ED tax credit, is a government program aimed at helping and bettering the economy and Canadian society.
Let’s learn about what are SR&ED credits:
Who can apply for SR&ED credits?
SR&ED credits are available to corporations, individuals, trusts, and partnership members.
The work that qualifies under SR&ED includes engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research.
Among the work that does not qualify for SR&ED, the list includes market research, sales promotional research, quality control or routine testing of materials or processes, research in the humanities and social sciences, prospecting or drilling for mineral, petroleum, or natural gas, commercial production of new or improved material or product, style changes, or routine data collection.
Does your work qualify for SR&ED tax credits?
To qualify under the SR&ED program, your work must, first, be conducted in Canada. It must be classified as either basic research, applied research, or experimental development. The work conducted must gain new knowledge to either achieve an objective or resolve a problem.
Also, the work is assumed to be either an investigation or search carried out in science or technology through either experimentation or analysis.
What incentives are available under SR&ED credits?
SR&ED credits are divided up into three categories: income tax deductions, ITC or investment tax credits, and refunds.
Most businesses do two things with SR&ED tax incentives. They can pool SR&ED expenditures, deducting them against current-year income or holding off until a future year. They can also reduce income tax payable by tapping into the SR&ED investment tax credit (ITC).
In some cases, the CRA may even refund what’s remaining on one’s ITC. ITCs can be carried back three years or forward 20 years, applying them against tax payable.
Benefits for a Canadian-controlled private corporation
If you are a CCPC, you can earn a refundable ITC at 35% on all qualified SR&ED expenditures up to $3 million. You can also earn a non-refundable ITC at 15% on any amount over $3 million. Assuming you meet the definition of a corporation, you also earn a refundable ITC at 15% on amounts over $3 million, and 40% of the ITC can be refunded.
If you are an individual, aka a proprietorship, you must first apply your ITC against tax payable before the CRA can refund 40% of any unclaimed balance earned in the year. As an individual, you can earn a refundable ITC at 15% on all qualified SR&ED expenditures within this framework.
What expenditures can I claim under SR&ED tax credits?
In determining what you can claim or not claim, you must consider what work was done, the parties who performed the work, when the work was done, and the length of time it took to complete. The list of allowable expenditures under SR&ED includes salary and wages, materials, contracts, overhead, and third-party payments.
SR&ED Work vs Non-SR&ED Work
In production and manufacturing facilities, often SR&ED work is being completed alongside non-SR&ED work. This can create a mess when it comes time to apply for SR&ED credits, as you’re required to sort through what qualifies and what doesn’t. This is why you should track SR&ED separately.
SR&ED claim approval
The CRA is tasked with processing all SR&ED applications. Assuming you have filed a complete claim, as defined by the CRA, if it’s an approval, you can expect to have it processed within 60 calendar days of the day the documents are received. For refundable claims that have been selected for an audit, the CRA aims to have that done within 180 calendar days of the date a complete claim is received.
In some instances, there could be issues elongating the SR&ED application process. This would include situations where the claim is incomplete, or the SR&ED claim is filed without the associated income tax return. A claimant also should be available to the CRA, i.e. requests for information may be filed that require a response or meetings with the CRA that have to be scheduled.