We created this list of Q&A to help answer questions you may have about SR&ED tax incentives.
Disclaimer: The following information is intended to bring awareness to the subject matter. The provided information is not intended to replace the legal advice of a tax lawyer specialized in SR&ED.
Question 1: What are the eligible SR&ED activities?
- Experimental development – attempting to achieve technological advancement.
- Applied research – attempting to advance scientific knowledge with a specific and practical application in mind.
- Basic research – trying to advance scientific knowledge, but with no practical application in mind.
- Support Work – undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support of work described in the above.
Question 2: What are the ineligible SR&ED activities?
- Market research or sales promotion.
- Quality control or routine testing of materials, devices, products, or processes.
- Research in the social sciences or the humanities.
- Prospecting, exploring, drilling for, or producing minerals or petroleum. The commercial production of a new or improved material, device or product.
- Style changes.
- Routine data collection.
Question 3: What are the eligible expenses under the SR&ED tax incentive?
Expenses that can be compiled when calculating credits are as follows:
- Salaries and wages
- Materials consumed or transformed
- Subcontracting fees
- Overhead
*Prior to 2014, capital expenditures, such as new equipment and machinery were eligible for SR&ED credits. Since then, they’ve been eliminated from the program, but may be deducted from business income as a depreciation expense.
Question 4: My project was completely unsuccessful. Can my company still claim the SR&ED tax credit?
Projects that are abandoned, delayed, or discontinued all qualify for SR&ED tax incentives if they can be shown to have been undertaken with the intent of technological advancement. As the Canada Revenue Agency notes, “The key point is whether the work has the characteristics to meet the definition of SR&ED.”
Question 5: How long does it take to receive a refund once my SR&ED claim has been filed?
The Canada Revenue Agency (CRA) has the following service standards for processing SR&ED claims:
All claims which have been accepted as filed will be processed within 60 calendar days of the date we receive a complete claim. Refundable claims selected for review/audit will be completed within 180 calendar days of the date we receive a complete claim.
Question 6: My company has recently been informed about the SR&ED tax credit program. May I still apply for a credit?
For corporations, the reporting deadline for SR&ED claims is 18 months from the end of the tax year in which you incurred the expenditures.
Question 7: We contracted out most of the R&D work done in our company. Can we still claim the SR&ED tax credit?
It is a best practice in business to have a clear agreement before starting to work with a contractor.
Establishing a detailed scope of work with your contractor is key to a successful SR&ED project. Therefore, the contract should plainly state that SR&ED work is to be carried out by the CONTRACTOR.
As an example: “CONTRACTOR shall perform SR&ED work on behalf of PAYER.
The SR&ED work includes but is not limited to design, develop, integrate, test, and verify performance”.
The question is not whether SR&ED work was carried out, but whether SR&ED was carried out because it was required under the contract.
In the absence of such specification or if the substance of the contract or the work performed is different from the agreement in the contract the following criteria should be applied to determine who is eligible to claim SR&ED.
- Control of the work: The contract between both parties should state that the PAYER will control and lead the project from a technical standpoint. The PAYER has technical authority over the CONTRACTOR’s work.Additionally, it is preferable to state that the CONTRACTOR’s team will act as members of the PAYER’s team.
- Intellectual Property (IP): It is recommended that PAYER owns the IP to demonstrate that the CONTRACTOR work is carried out on behalf of the PAYER.
- Prices vs Risks Assumed: A ceiling price clause for CONTRACTOR services render the carry-out of SR&ED on behalf of the PAYER debatable. The same applies to a price clause based on deliverables or results. This may be interpreted as a sale of a product and not rendering services on behalf of the PAYER. On the other hand, a cost-plus pricing agreement typically indicates that SR&ED work is carried-out on behalf of the PAYER.
- Service agreement vs the sales of a product: Contract for a service indicates that the PAYER can claim SR&ED costs. On the other hand, a contract for a product means that SR&ED work was not performed for the PAYER. Consequently, the contractor has the right to claim SR&ED.
None of the above criteria weigh up more than the other in identifying which entity has the right to claim SR&ED. The four criteria must be analyzed based on a case-by case study. It is strongly advised to implement the above cited criteria in the agreement with the CONTRACTOR.
Question 8: What if similar products to mine exist? Is our work still eligible for an SR&ED tax credit?
The Scientific Research and Experimental Development (SR&ED) program focuses on developments within a business context. As long as you have not created your product from publicly available information, the Canada Revenue Agency would examine how your business meets the project’s goal.
That means that two different companies might be trying to obtain the exact same result but will do so in different ways that are unique to each company.
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