Scientific Research & Experimental Development (SR&ED), or commonly pronounced as “Shred”, is a Canadian federal tax incentive program administered by the Canada Revenue Agency (“CRA”). SR&ED is intended to encourage Canadian businesses to conduct research and development (R&D) to create new or improve existing products, processes, principles, methodologies or materials. It is the largest single source of federal government support for industrial R&D. SR&ED may be used by businesses of all sizes and in all sectors of the economy. There are also a range of provincial programs which work in tandem with SR&ED to complement the federal program. Please contact us to learn more.

The SR&ED program’s research & development definition is somewhat different than what most individuals think of when they hear R&D. R&D means that you are trying to advance the state of your technology through a systematic approach while overcoming technical challenges. This means that SR&ED is not just available to research intensive industries; rather it is available to any company which faces technical challenges. The SR&ED program takes into account information available in the public domain (i.e. searches on Google, etc.) as well as the context of your company. If you can’t find a solution to your technical problem in the public domain then this is where your SR&ED work may begin. Certain technological challenges arise from constraints faced by your specific situation due to legacy support issues or legacy equipment used. Overcoming these types of technical challenges in a systematic way could make the work eligible for SR&ED tax credits. Please contact us to learn more.

Any work undertaken to resolve a technological challenge or uncertainty where you couldn’t get the solution in the public domain (from a Google search, white paper, etc.) as long as it is undertaken in a systematic way by qualified personnel (not a training program). This means that any time you are taking a technical risk in order to advance your technical baseline (to meet business requirements or improve your product or process), even if it is for a marginal improvement, you may qualify for SR&ED tax credits.

To qualify for the SR&ED program, work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel. Work that qualifies for SR&ED tax credits includes:

• Experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
• Applied research to advance scientific knowledge with a specific practical application in view;
• Basic research to advance scientific knowledge without a specific practical application in view;
• Support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, but only if the work is commensurate with, and directly supports, the eligible experimental development, or applied or basic research.

The three primary criteria for determining if work is eligible for SR&ED:

Technological Advancement. The search carried out in the experimental development activity must generate information that advances your understanding of the underlying technologies. In a business context, this means that when a new or improved material, device, product or process is created, it must embody a technological advancement in order to be eligible. In other words the work must attempt to increase the technology base or level from where it was at the beginning of the project.

Technological Uncertainty. Technological obstacles/uncertainties are the technological problems or unknowns that cannot be overcome by applying the techniques, procedures and data that are generally accessible to competent professionals in the field.

Technical Content. A systematic investigation entails going from identification and articulation of the scientific or technological obstacles/uncertainties, to hypothesis formulation, through testing by experimentation or analysis, to the statement of logical conclusions. In a business context, this requires that the objectives of the scientific research or experimental development work must be clearly stated at an early stage in the evolution of the project, and the method of addressing the scientific or technological obstacle/uncertainty by experimentation or analysis must be clearly set out.

A number of different types of expenditures qualify as SR&ED expenditures as follows:

• Salaries for those directly involved in SR&ED eligible work
• Subcontractor costs for directly involved SR&ED eligible work
• Material costs required to achieve your technological advancement(s)
• Overhead for office expenses and miscellaneous overhead costs (standard 55% rate applied to salaries)

Federal SR&ED Investment Tax Credit: 15% federal tax credit for all qualifying R&D costs for eligible activities carried on in Canada. The credit rate is increased to 35% for small Canadian-controlled private corporations (on expenditures up to $3M per year). This 35% credit is fully refundable.

Provincial SR&ED Incentives: Tax credits ranging from 4.5% to 37.5% depending upon the provincial jurisdiction.

The process for submitting a SR&ED claim with assistance from outside consultants includes:

• Initial informal assessment to see if your projects may qualify for SR&ED
• Interviews are held to identify projects that may meet the CRA eligibility criteria
• Data is gathered for SR&ED reports (through phone calls and email communication)
• Prepare a technical SR&ED report which summarizes how your claim meets the SR&ED eligibility criteria; a draft report is prepared which is then reviewed by the company to ensure it is accurate; changes are made to the report based on company feedback
• Coordinate with your accountant to identify costs associated with the projects (i.e. review T2 Corporate Tax Return and financial information)
• Complete all prescribed CRA forms required for a successful SR&ED claim
• Submit the SR&ED claim to the CRA and monitor for acceptance
• Success fees are paid to the consultant only after the SR&ED claim is accepted by the CRA (if your SR&ED claim is not successful, you don’t pay anything)

Generally speaking, ~ 75% of SR&ED claims are accepted without further enquiry by the CRA. Sometimes there may be a call with CRA where they ask questions on your report (such as a call with CRA’s First-Time Claimant Advisory Services team). Should these calls occur, our team will join you for these calls to help manage the CRA communication. Please contact us to learn more.