SR&ED in Canada: The Basics

Every year, the Canadian government gives an average of $4 billion to businesses across the country. Through cash refunds and tax credits, Canadian government supports the businesses that are improving products they already manufacture, create new products, as well as supports the business that are changing processes and develop their own software.

About 20 years ago, the Canada Revenue Agency (CRA) developed the Scientific Research and Experimental Development (SR&ED) program. The aim of the program was to encourage technical development among companies by offering tax credit incentives and refunds to businesses that perform any kind of Research and Development in Canada. In the most general sense, the program works by reimbursing eligible companies for money that has already been spent. In other words, the government compensates for developing and improving the products that the companies would have been working on anyway.

Not a bad idea, eh? But how does a Canadian company gain access to these funds? And, more importantly, exactly how much could you get back?

Through the federal portion of the SR&ED program, small to medium sized businesses operating in Canada can receive up to 72.1% back on eligible labour expenses – or the time spent creating new or developing existing products and processes. On top of that, most provinces in Canada also offer a provincial tax credit, which ranges from 10% to 35%.

So what types of companies are eligible for the SR&ED program?

Generally speaking, there are three criteria for eligibility for the SR&ED program. They are: Technical Uncertainty, Technical Advancement and Technical Content.

Technical Uncertainty assumes existence of an obstacle that requires development of a brand new solution in order to overcome it. In order to qualify for the SR&ED program, the developed solution must reach beyond the existing knowledge and remove the technical uncertainty.

The second criterion is Technical Advancement. To put it simply, this affirms that the technical uncertainty has been solved through advancing the knowledge and understanding of various technologies.

Finally, Technical Content, also known as Systematic Investigation, must demonstrate that some sort of scientific process was implemented into the solution of technical uncertainty.

The process is straight forward in practice. Having set the final objective, you apply technological experimentation in order to reach your goal. In the end, you must come away from it with more knowledge and understanding than you had before.

As easy and straightforward as it sounds, the CRA estimates that nearly 50% of companies that are eligible for the SR&ED program do not actually apply for it. In most cases, this is because many Canadian business owners do not realize that what they are doing fully qualifies as Scientific Research and Experimental Development. So, ask yourself – have you developed a new product? Improved an already existing one? Changed a process? If you have, there is a good probability that you may be missing out on a reimbursement program that could provide your company with some much-needed cash refunds.