What is Scientific Research and Experimental Development SR&ED?
It’s an excellent question, one that has previously been answered in the SRED Section of our website.
The following info can also be found in the CRA document Overview of the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program (RC4472). This document was produced by the Canada Revenue Agency (CRA) in 2008 and remains one of the best explanations of the program.
What is the SR&ED program?
The Scientific Research and Experimental Development Tax Incentive Program (SR&ED) applies to Canadian businesses of all sizes and any industries that conduct research and development activities.
Companies, private contractors, trusts, as well as corporations that are settled in Canada can all benefit from this financial incentive from the provincial and federal governments.
Every year, the SR & ED program provides over 3 Billion in tax incentives to over 20,000 applicants, from which 75% of them are considered small businesses.
What’s the objective of the SR&ED Program?
The objective of the SR&ED program is to deliver SR&ED tax incentives in a timely, consistent and predictable manner while encouraging businesses to prepare their claims in compliance with tax laws, policies, and procedures.
The Canada Revenue Agency (CRA) is constantly striving to modernize and enhance their services. The agency’s mission is two-fold – both guaranteeing businesses know how to access the program with relative ease while also upholding fiscal integrity through a commitment of applying legislation correctly, unbiasedly, and making sure claimants receive the full stipend to which they are entitled.
What are the benefits of SR&ED program?
The SR&ED program offers key financial incentives to companies of all sizes thanks to its focus on helping fund scientific and technological advances that give businesses a competitive edge and raises their chances of success when applying for SR&ED projects.
SR&ED can provide a variety of benefits, such as deductions against current tax liability or refundable investment tax credits.
Plus, unused SR&ED ITCs have the potential of being carried back three years or forward 20 (or 10 for those earned prior to 1998) for those future tax liabilities that need further coverage.
By taking advantage of SR&ED’s many offers, you can put yourself in an advantageous financial position compared to other market players.
The SR&ED Program is available to any business actively conducting and carrying out research and development activities in Canada. SR&ED expenses incurred overseas can also be permitted. SR&ED eligibility can apply to any business involved in basic or applied research that seeks to further technology, materials, devices, products or processes. SR&ED eligible entities include :
- Proprietorships (individuals), partnerships and trusts.
- Other corporations.
- Canadian-controlled private corporations.
Proprietorships, partnerships and trusts
With regards to proprietorships, partnerships and trusts, the SR&ED Investment Tax Credit (ITC) rate stands at 20% of qualified SR&ED expenditures both current and capital. A cash refund on 40% of the balance of ITCs earned in the given tax year is granted after ITCs are applied against taxes payable. In other words, SR&ED is a productive way to incentivize innovative projects while at the same time reducing the amount your business must pay in taxes.
The ITC is an important procurement for many corporations and businesses that partake in SR&ED. Qualified SR&ED expenditures, whether current or capital, are eligible for up to 20% investment tax credit (ITC). Though this amount cannot be refunded in cash, the ITC can be used to reduce taxes payable. The ITC should be taken into account when assessing SR&ED spending plans, as it can help to create savings and add extra value to SR&ED investments.
Canadian-controlled private corporations (CCPCs)
As a Canadian-controlled private corporation (CCPC) eligible for SR&ED, you may qualify for a refundable investment tax credit (ITC) on your qualified SR&ED expenditures. This credit can be used to reduce any taxes payable in the year of the claim, with any remaining balance issued as a refund. The rate of refundability depends on the taxable income and capital from the previous year along with the SR&ED expenditure limit, detailed in the SR&ED Investment Tax Credit Rates table outlined later on in this guide. Be sure to read all details around eligibility to ensure you receive your maximum ITCs.
What is considered as SR&ED Work:
In order to qualify for SRED, the work needs to fall into one of the following categories:
- Experimental development : the work done in order to achieve some sort of technological advancement with the specific goal to create or improve new products, processes, devices, processes and materials.
- Applied research – This is work done to advance scientific knowledge with a specific practical application in view.
- Basic research – The work done to achieve a certain advance in scientific knowledge without a specific practical application in view.
SR&ED can also include other work that is directly in support of the experimental development, applied research or basic research. This support work includes only the following eight specific types:
The SR&ED program can also include work that is directly involved in supporting applied research, basic research and experimental development. THis type of support work will include the following 8 types of work:
- Operations research
- Data collection
- Computer programming
- Psychological research
- Mathematical analysis
What is not considered as SR&ED work?
The following work is not considered eligible when it comes to claiming benefits under the SR&ED program:
- Sales promotion or Market Research
- Prospecting, exploring or drilling for, or producing minerals, petroleum or natural gas;
- Commercial production of a new or improved material, device or product, or the commercial use of a new or improved process;
- Quality control or routine testing of devices, materials, processes or products;
- Research in social sciences or the humanities;
- Style changes; and routine data collection.
What are the requirements for eligibility?
For any R&D work to be eligible for SR&ED:
The work must be a systematic investigation or search carried out by means of experiment or analysis;
- This would include the following steps:
- Identifying the obstacle that the company is facing
- Formulation clear objectives and KPIs
Developing a plan to tackle the obstacles and a plan of action that will include the method the company is going to be using to experiment, carry out an analysis and to test the hypothesis.
That work must be carried out in the field of technology or science that is not excluded by what the SR&ED program allows.
■ Excluded work is described under the heading “What is not considered as SR&ED work ?”
The work must be undertaken either:
■ For the purpose of achieving technological advancement.
The work must at least be able to increase the technology base or performance from where it was at the beginning of the process.
The technology base involves all the resources within the business’s reach and all the knowledge about that technology that is available on the public market.
■ For advancing scientific knowledge.
A systematic investigation or search must be carried out with the aim of generating new scientific information or understanding of scientific relations.
What are the expenditures that a business can claim?
Businesses may claim many of the expenditures incurred for SR&ED during your fiscal year. These expenditures may include:
- Wages & Salaries.
- Third-party payments.
How do you determine your SR&ED expenditures?
1. Traditional Method
The traditional method involves adding up all your SR&ED expenditures your business has incurred during your fiscal year and claiming all of them.
Overhead costs must be specifically identified.
2. Proxy Method
R&D and SR&ED tax credit claims often rely on the traditional method of attaching specified costs to R&D initiatives. However, an alternate approach involves using a formula-based method which simplifies the R&D budgeting process.
By this technique, business owners are able to conveniently calculate a substitute amount for all overhead expenditures as opposed to identifying and tracking every expenditure separately for R&D programs.
This method involves using a formula to calculate a substitute amount for all your overhead expenditures instead of identifying and allocating your expenditures like in the traditional method.
How can you submit a claim:
In order to make an SR&ED claim, you must file your business’s income tax return along with the following suggested forms:
- Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim along with one of the forms below:
- Form T2SCH31, Investment Tax Credit – Corporations, or,
When should you send in your claim?
In order to apply for the SR&ED Tax incentives, it is better for the applicant to file the mentioned forms while respecting a deadline of 18 months from the end of the corporation tax year.
What happens if you do not report a certain project or expenditure before the deadline that’s put in place?
You will not be able to use the expenditures of those amounts spent in your pool of deductible SR&ED expenditures to reduce your total income. Which then leads to you not earning your investment tax credit on these expenses.
So what are the next steps:
If you’re thinking about investing in R&D for your business, there’s no reason not to take advantage of the SR&ED program.
The annual impact of SR&ED is significant, and your business could receive substantial financial benefits by participating in the program.
To learn more about whether your business is eligible for SR&ED benefits, contact a qualified professional at Avinova