- Western Canada
- Central Canada
- Eastern Canada
- About Us
About the SR&ED Program
What is SRED?
SRED (or SR&ED) refers to the Canadian Government's "Scientific Research and Experimental Development" program. This is a generous incentive program that rewards companies of any size for conducting Research and Development activities in Canada.
Who is Eligible?
Many companies fail to make an SRED claim because they falsely assume that the program is restricted to "High Tech" companies. The fact is that virtually any company may have "pockets" of SRED activities going on at any given time. In general, if some of your staff are engaged in solving technological problems for which a solution is not readily apparent, there is a good chance that the work they are doing is fully or partially eligible for SRED credits. In many cases, the companies who receive SRED credits might be considered relatively "Low Tech" such as Welding firms or Tool & Die makers.
How Much Can I Receive?
One important aspect of SRED is that credits are always a percentage of the amount spent on R & D activities conducted in Canada. Therefore, if your company does not spend very much money, it won't be eligible for much in the way of credits. Entrepreneurs often make the mistake of sacrificing a salary for months, or even years, to help get their company off the ground. This greatly reduces the size of their Scientific Research claim since wages tend to be the biggest contributor to SRED credits. Similarly, companies that do most of their work offshore will not be eligible for substantial SRED claims.
The greatest SRED benefits are reaped by Canadian-controlled private corporations. CCPCs can earn SRED tax credits for 35% of eligible expenditures up to the first $2 million. For eligible expenses beyond $2 million, companies can receive credits of 20%. Other Canadian corporations such as public companies, partnerships, trusts, etc. can earn tax credits equal to 20% of qualified expenditures for SR&ED conducted inside Canada.
What Costs can be Included?
When filing an SR&ED claim you want to maximize the claim by ensuring that all eligible costs are included in the expense calculation. These costs can include wages of personnel directly engaged in SRED activities as well as certain support staff. Consultants engaged in R & D activities associated with the SRED projects can also be claimed. Additional costs such as overhead and other current expenditures incurred as a result of the SR&ED project and the cost of capital equipment that is purchased in the pursuit of technological advancement can also be claimed. The rules concerning which costs are eligible for claiming under SR & ED are fairly lengthy and complicated, an experienced SRED consulting or accounting firm can help to ensure you are not missing out on eligible expenses.
How are SRED Credits Paid?
The method of payment depends on the type and profitability of the company applying for the credits. In some cases the credits are "refundable", meaning the government will issue a cheque for the credits after deducting any taxes due, in other cases the credits are "non-refundable", which means the can only be used to reduce past or future tax liabilities.
For CCPCs, the prior year's taxable income is used to determine the extent to which the ITCs are refundable. They are fully refundable if the CCPC's taxable income does not exceed the small business limit. This limit is $300,000 in calendar 2006 and increases to $400,000 in calendar 2007 and beyond. It may even be advisable to "bonus down" your company's profits to keep net income within the small business limit threshold so that your refund remains refundable.
For public companies, Investment Tax Credits are not refundable but may be used to reduce any taxes payable. For this reason, Federal SRED credits do not provide an immediate benefit for unprofitable corporations, however credits can be carried back 3 years or forward for up to 10 years to reduce future tax liability. Note that some provinces offer a provincial SRED component that may be refundable even when the federal SRED credits are non-refundable. Here is a summary of the Provincial Credits.
The Investment Tax Credits earned by a proprietorship or certain trusts may be partially refunded after applying the ITCs against taxes payable.
What Determines an Eligible SRED Project?
At least 95% of all SRED claims involve Experimental Development (as opposed to Scientific Research). In general, Experimental Development projects qualify as SRED projects if they satisfy three main criteria:
1. Must Have Technological Uncertainty
A key criterion is that there must be technological uncertainty involved in the SR&ED project being claimed. Basically, this means that there is no obvious solution to the problem you are attempting to solve and a solution is not readily available through normal investigation.
It is important to distinguish "technological" uncertainty from other types of uncertainty that are irrelevant to SRED eligibility. For example, a project may have business uncertainty in that you may be unsure of the cost to take a product to market or whether it is feasible to utilize certain sales channels. These types of business issues do not have any bearing on SRED eligibility.
In general, if your company is undertaking a project where, at the outset, qualified staff really don't know how to solve the problem they are being asked to solve, there is a good chance that technological uncertainty is involved. It is assumed that your staff are well trained and educated in the field of science to which their skills are being applied. Also, if a solution is readily apparent through a reasonable amount of research, it is not likely SRED eligible.
2. Must Conduct a Systematic Investigation
In order for a project to be considered SRED eligible, a systematic investigation must be performed in an attempt to resolve the technological uncertainties.
Most SRED eligible projects hit "Road Blocks" or hurdles that cannot be easily overcome. Your company may attempt several different approaches before arriving at an acceptable solution. Random attempts at a solution do not qualify as SR&ED since random techniques are generally not systematic. Instead, the results from a failed approach should be used to help determine the next solution to be attempted. That is, by applying knowledge gained in a previous attempt at a solution you can usually choose a new course that has the greatest likelihood of a positive outcome.
In general, most R & D is systematic anyway, since skilled workers will always try to choose a path that has the highest probability of a successful outcome based on their analysis of prior attempts.
3. Must Achieve a Technological Advancement
Although this requirement seems the most daunting, it is actually among the easiest to satisfy. This is because there is no requirement to have a successful project outcome in order to realize a technological advancement. For example, let's say you attempted three different ways to resolve a technological uncertainty, none of which were successful. In this case, your advancement is in proving that these three techniques are not feasible.