In today’s business culture, technological innovation and rapid global expansion are driving businesses to invest more in research and development activities to give their organizations a competitive edge. The Canadian Government has recognized the importance of scientific research and experimental development (SR&ED) and has since released the SR&ED Investment Tax Credit (ITC). Canada Revenue Agency (CRA) estimates that approximately 50% of the eligible companies in Canada are not filing their SR&ED tax credits and are unsure of the exact definition regarding, what is SR&ED?
Scientific Research and Experimental Development (SR&ED) Tax Incentive Program
SR&ED Tax Credits (ITC) provide Canadian businesses with the ability to receive significant tax credits for SR&ED activities, which can be refundable in cash or used to offset outstanding taxes. SR&ED can be defined under the Canadian tax rules as “a systematic investigation or search carried out in a field of science or technology by means of experiment or analysis”. Projects or activities that qualify for SR&ED tax credits generally include:
- Experimental Development: Technological Advancements that result in the development of new or improvement of existing materials, products, devices, or processes;
- Applied Research: Studies to advance scientific knowledge with a specific practical objective in place;
- Basic Research: Studies to advance scientific knowledge without a specific practical objective in place.
What is Eligible for SR&ED Research and Development Tax Credits?
In the last Federal Budget, Significant Changes to the SR&ED ITC Program were finalized; however, the program continues to provide refundable research and development tax credits to encourage the improvement of existing or development of new products and processes through SR&ED research and development activities. Canadian-controlled private corporations (CCPCs) are eligible through ITC to receive up to up to 35% of the first $3 Million of qualified SR&ED R&D expenditures. Some of these qualified expenditures may include but are not limited to:
- Salaries or Wages of Employees Directly Engaged in SR&ED;
- Costs of Materials Consumed or Transformed for SR&ED purposes;
- Contracts for SR&ED Activities Carried Out by a Subcontractor;
- Purchase, Lease, and Maintenance Costs for Facilities used Directly for SR&ED;
- SR&ED Capital Expenditures for New or Used Equipment.
For a more detailed definition of qualifying SR&ED expenditures, please see the Canada Revenue Agency’s CRA Form T661.
Depending on the industry and research activities, businesses may also be eligible to leverage their research and development expenses with the following Canadian Business Funding Grants:
- IRAP Accelerated Review Process (ARP): Up to $50K in non-repayable grant funding, compensating businesses for 80% of the direct labour and 50% of sub-contractors employed for a technical research project to solve an innovation challenge.
- IRAP Mid-Sized Projects: Covers up to 60% of projects at an average size of $140K, which must be technical or research oriented to solve an innovation challenge. Includes payroll and consultants for product development and exploratory research.