Frequently Asked Questions
I was asked if I have considered claiming tax credits for “SR&ED”. What is SR&ED?
It stands for “Scientific Research and Experimental Development”. It’s a government incentive program to encourage Canadian businesses to develop new or improved products or processes. The federal government pays out almost one and half billion dollars annually under this program. It is estimated that for every dollar paid, more than two dollars go unclaimed because companies are not aware of their eligibility.
Do I need to be some kind of research laboratory to qualify?
Scientific Research (whether Pure or Applied) is one of the activities the program supports: that’s the “SR”. But by far the larger share of the pay-outs of this program go to Experimental Development (the “ED”). If your work includes creating new products, or improving your old ones, you are performing product development. The key question is whether this development is experimental in nature.
Isn’t any development process “experimental”?
In a sense, yes. But what this program is trying to encourage is development that advances the technology base of Canadian businesses and makes them more competitive in the global marketplace. The work has to meet these criteria: it seeks a technological advance; it attempts to resolve a technological uncertainty; and, it involves systematic investigation by appropriately qualified people.
What qualifies as a “technological advance”?
It’s more than building a better mousetrap: it’s something that creates knowledge that advances our understanding of some aspect of science or technology that goes beyond the standard practice in the field.
Any development involves uncertainty, and may fail. Doesn’t this make any development project eligible?
The key factor determining eligibility is the nature of the uncertainty, and the reasons for possible failure. Technological uncertainty means that whether the desired result can be achieved, or how to achieve it, is not known or cannot be determined from generally available knowledge or experience in that field of science or technology.
I wouldn’t call my product developers very systematic, but they always seem to come up with improvements anyway. Is that “systematic investigation” criterion important?
The belief is that true scientific and technological advances come about by methodical, planned investigation, not by random trial-and-error or luck. But in fact your developers may not be working quite as haphazardly as you (and even they) may think.
It appears we do indeed carry out what would be considered “experimental development”. Does this mean I can claim a credit on all my expenses?
You can only claim for “eligible SR&ED work”, work done to achieve a technological advance in your field of expertise. Other business activities, such as market research, sales promotion, quality control and other commercial production activities, as well as routine development using standard practice, would not be considered eligible.
We’re a small start-up company: until our development is complete, we have no taxable profits, just expenses. How will a tax-credit scheme help us?
If your business is a Canadian-controlled private corporation with less than $500,000 taxable income in the previous year, you may be eligible to receive a refundable investment tax credit (ITC) of 35% or more of your qualified SR&ED expenditures. You may receive it even if you have no taxable income.
I think I have a general idea of the program, but I’m sure it is more complicated when you get down to specifics. Is it a lot of work to claim these credits?
This was only intended to give you a very general overview of the SR&ED program — just enough to help you decide whether to consider claiming. The amount of work involved will be directly related to the number of projects claimed and the number of fiscal years for which a claim is made. It has been estimated that it involves about $20,000 of internal costs to make an average fiscal year’s claim. Many companies outsource this function to consultants. They can advise you as to the costs and benefits of making a claim.