How to Claim SR&ED Tax Credit: The Canadian Tax Incentive Program

How to Claim SR&ED Tax Credit: The Canadian Tax Incentive Program

For over 50 years, enterprises all throughout Canada have benefited from claiming SR&ED tax credits. 

And it’s not just global enterprises.

Large, medium, and small businesses in Canada are all reaping the rewards of this tax incentive program.

Namely, companies that are in the technology and research niche. 

There are numerous success stories from businesses that have taken advantage of this tax credit. 

That said, there are a few who are unsure as to how to incorporate it in their business strategy or whether they’re even entitled to this type of program.

We’ve simplified the complexities of these tax services so you can learn just how you can claim it if you qualify. 

Stake a claim to what’s rightfully yours and watch your business soar today. 

What is SR&ED Tax Credit?

The Scientific Research and Experimental Development (R&ED) tax credit is a federal tax relief incentive that the Canada Revenue Agency (CRA) prepares, administers, and manages. 

The Canadian Federal Government runs this program as a means to support businesses that carry out research or are engaged in developmental work. 

It is a federal tax incentive that encourages Canadian enterprises that dedicate themselves to the creation and improvement of both existing and novel methodologies, processes, services, and products. 

Consequent to its purpose, SR&ED tax credit does not discriminate against the size of a business. 

Businesses of all sizes are permitted under this income tax act. T

his allows both global enterprises as well as small startups in Canada that fall under this specific niche to access the tax incentive. 

The Canada Revenue Agency dedicates more than $4 billion to this tax incentive program every year. 

On average, for every $4 billion allocated to the program,18,000 claimants derive benefit. 

If you are successful in claiming, The CRA determines your tax free allowance based on the money you invest in scientific research or innovative development. 

In short, it seeks to motivate enterprises in Canada to invest in more innovative projects. 

Albeit the risk associated with these projects is higher since they do not follow the beaten track, the compensation offered in exchange for the efforts put in is worth it. 

Benefits of SR&ED Tax Credit

Before we take a look at SR&ED claims, let’s first examine the benefits they can bring to your business. 

The SR&ED tax credit incentive features two main benefits to qualifying enterprises: 

  1. SR&ED Expenditure: Under this program, you can decide between one of two choices. The first is to group together all your qualifying expenses and subtract them from the year’s income in which you incurred them. Or, you can decide to forward the expenses and apply them to your yearly income in the future. In both cases, the program affords you flexibility in how you claim taxes. This is something that may work well for you if you incorporate it into a business strategy.
  2. SR&ED Investment Tax Credit (ITC): As opposed to pooling together your qualifying expenses, you can claim ITCs. These can later be used to offset a percentage of your income tax payable. Just like the former benefit, with ITCs, you can keep them for as long as 20 years. During that time, you withhold the option to apply them during any tax period that you see fit. 

Your ITC constitutes anywhere between 15% and 35% of qualified SR&ED expenses.

What You Can Claim From SR&ED Tax Credit

Companies whose SR&ED expenditures claims are approved can get back as much as 70% of their qualifying expenses. 

Image Credits: oecd.org

Under the program, you can claim expenditure on the following categories: 

  • Salary and wages: Under this program, salary and wages constitute income and expenses that stem from employment. This includes bonuses, management fees, vacation pay, sick leave pay, and any other associated costs. 
  • Materials: This encompasses materials, resources, and items used during the development or creation process that rendered a cost onto the developer. 
  • Third-party payments: Third party payments make up those that a claimant carries out to another entity for the purposes of SR&ED. For more information on the specific policies that govern this type of expense, check out the CRA’s Third Party Payment Policies
  • Overhead Expenses: These refer to a specific type of qualifying expense that is incremental in nature. 
  • Contractual Expenses: Certain SR&ED projects come with contract expenditures that the developer needs to undertake. 

Who is Eligible for SR&ED Tax Credit

As mentioned, the SR&ED tax program does not preclude businesses from claiming it based on their size or member composition. 

That means that trusts, public and private corporations, partnerships, and individuals can be granted SR&ED tax credit. 

The key isn’t the type of enterprise; rather, the type of research that the enterprise undertakes. 

What Projects Qualify For SR&ED Tax Credit

The projects that meet the requirements of SR&ED tax credit fall under three main categories: 

  1. Technical Content
  2. Technological advancement
  3. Technological uncertainty

The CRA then evaluates the contributions that your enterprise makes against these three categories and comes up with a verdict. 

There are guidelines that govern the eligibility of work for SR&ED tax credit as well as an SR&ED glossary of terms that define the categories listed above.

Apart from defining the parameters of project eligibility, the guidelines also point out areas in which the CRA does not compensate under this program. 

These non eligible works include: 

  • Exploration, production, and drilling of petroleum, natural gas, and minerals.
  • Quality control, assurance, or testing of products, materials, or processes
  • Research that falls in the bracket of humanities or social sciences
  • Sales promotion or market research
  • Commercial production

To help business leaders categorize the type of work they do as either SR&ED tax credit approved or not, the CRA has released five questions that they use in their selection process. 

These cover topics relating to the hypotheses, experiments, and analyses used in your work as well as the project’s purpose. 

Image Credits: Canada.ca

Systematic investigation, research and development are qualities that the CRA values when reviewing your application to their tax credit program. 

How You Can Claim SR&ED Tax Incentive

In order to claim anything under the SR&ED tax incentive, you need to apply. 

To begin, you need to complete a Form T661 (Scientific Research & Experimental Development). 

Then, you have to complete either a Form T2SCH31 (Investment Tax Credit - Corporations) or a Form T2038 (Investment Tax Credit - Individuals). 

The one you will have to fill out depends on whether you’re claiming expenditure as an individual or as a corporation. 

As a corporation, you have 18 months following the end of the tax year to declare your expenses. 

For individuals, you have 17.5 months after the end of the fiscal year to apply.

Partnerships are also eligible for this tax program. However, when applying, they must apply using their individual tax returns. 

On it, you should only include the expenses that correspond to your end of the partnership. 

In all circumstances mentioned, be sure to calculate your expenses and submit the relevant supporting documentation. 

These documents must justify both the financial and technical operations that your business carries out. 

These are crucial as the CRA may require you to back up some of your expenses for data collection or any other SR&ED work. 

Processing times vary. However, the Canadian government has stated that they will process qualified expenditures within sixty (60) days of receiving the claim. 

Follow this, they will issue a cash refund in accordance with a sum that they will determine.

Claim Your SR&ED Tax Today

If your business meets SR&ED tax credit eligibility criteria, you need to apply now. 

Depending on your expenses, you can get back millions of dollars that you’ve invested in your projects. 

You can then use that money to fund another expense or Canadian business venture. 

Be smart about your spending and saving habits by taking advantage of the SR&ED program today.