Scientific Research and Experimental Development (SR&ED) is a federal tax incentive program offered by the Canadian Government to assist companies engaged in innovation. It aims to stimulate experimentation and technological advancement for the benefit of the Canadian economy.
All Canadian taxpayers who file a T1 or T2 tax return and develop new products, or enhance/modify/improve existing products or technological processes can apply. BIG has successfully assisted thousands of clients in industries including manufacturing, software & IT, biotechnology, food & beverage, tool & die, oil & gas, mining, machining and fabrication.
The SR&ED submission is not capped and therefore there is no predefined maximum amount that a company can claim. All expenditures can be submitted as long as the work meets the three SR&ED program criteria of technological uncertainly, systematic investigation and technological advancement.
BIG’s proven methodology guarantees claim preparation with a minimum amount of time and effort on your part. Our consultants are industry experts each with Masters or Ph.D. degrees in a specific field of science and engineering. Their industry experience helps them to understand your technical challenges and quickly identify eligible projects and expenditures (with negligible impact on your staff or interference with your day-to-day activities).
BIG offers a convenient contingency fee structure. There are no initial or hourly costs. There will be no fee unless your claim is approved by the CRA and you receive your benefit. Our business structure allows us to offer extremely competitive contingency rates, please contact us to find out more.
The CRA filing deadline for the SR&ED submission is 18 months after the last day of your fiscal year. At BIG, our initial filing can typically cover the previous two fiscal years. We prefer to submit applications for our clients well in advance of the filing deadline.
Revenue Canada commits to processing refundable claims which are filed jointly with the year-end T2 within 120 days. Non-refundable claims are processed within 360 days. Amended refundable and non-refundable claims are processed within 240 and 360 days respectively. In our experience, most claims are approved within 2 to 6 months.
Most companies think of R&D as occurring in dedicated research facilities or a lab setting. However, this is not the case in the SR&ED program. We find that there are very few scenarios in manufacturing, IT, biotechnology and other industries where SR&ED does not take place.
Many of our current clients did not initially consider any of their work to be R&D. This is a common misconception. Through the SR&ED program common, everyday activities on the shop floor or in an industrial setting are eligible – as defined by the CRA guidelines. Additionally, work does not have to represent a breakthrough or a ‘quantum leap’ in your industry.
Small incremental improvements and advancement in the design or formulation, materials, quality, durability, or energy efficiency of your product or process are sufficient.
Your company does not have to be profitable to apply for an R&D refund. SR&ED can be a refundable tax credit even if you did not pay taxes. In addition, any unused tax credits can be carried backwards 3 years or forward 20 years.
The eligible SR&ED work only has to be new to your company. Similar or more advanced products and/or process may already exist in the marketplace. As long as you encountered technological challenges that could not be readily resolved using knowledge in the public domain, and you tried to resolve these challenges in a systematic manner, then you are eligible for the SR&ED tax credit.
The commercial or technological success of your product and/or process is not a determinant in assessing the viability of your claim. Failed, abandoned or postponed projects still qualify for the SR&ED tax credit. The technological advancement in unsuccessful projects lies in ‘lessons learned’ and in-house expertise accumulated in the course of your systematic investigation.
Claiming IRAP does not preclude your company from benefiting from the SR&ED program. To the contrary, claiming both IRAP and SR&ED is to your company’s advantage as the latter is uncapped and encompasses a much broader range of eligible activities.
Work subcontracted to other entities on your behalf may be eligible for the SR&ED tax credit, subject to certain limitations. You must retain the intellectual property or rights to the work performed, and the subcontracts must be to other Canadian taxpayers with whom you deal at arms’ length.
Along with your income tax return, you must also file the completed T661 – Scientific Research and Experimental Development Expenditures Claim. Additional required forms include the T2SCH31 Investment Tax Credit or the T2038 (IND) Investment Tax Credit and the applicable Provincial incentive forms.
To be eligible, a corporation must satisfy three key criteria as part of their R&D process:
Technological advancement – The advancement does not have to be a huge breakthrough or quantum leap in your industry and does not have to be successful. It can be as simple as an incremental improvement on the shop floor as long as you are attempting to increase your base level of knowledge in your technology. Your competitors may already be doing the same but may not be showing or sharing the knowledge.
Technological uncertainty – Your company encountered a technical problem without apparent solutions that can be found in the public domain.
Systematic investigation – You must be using an experimental process to solve the problem.
Materials and contractors
Most R&D project-related expenditures are eligible including:
Salaries, wages and subcontract work
Wasted and consumed materials
Capital equipment for experimental use
Prototypes and testing equipment
Experimental development refers to a process through which companies are increasing their knowledge base in a field of technology by developing new products, prototypes or manufacturing techniques.
An application for a SR&ED refund must include:
A technical report detailing the development work performed
Financial schedules which are included with the tax return
The most critical part of the submission is the technical report. Qualifying claims can be rejected simply because of the quality of the technical report. CRA will not spend time searching for the merits of a project; they must be clearly stated in the original submission or a claim loses creditability and may be cancelled.
Generally, CRA will allow claims with less than ideal documentation for first time claimants. Recently the focus within CRA has been placed upon documenting the development process. Documentation required for an SR&ED claim includes records that separate the costs applicable to SR&ED from other project expenses. Also, project plans and activity reports for the work done on the project in the fiscal period are ideal documents to support a claim.
We can assist your company in creating a documentation trail. Projects should be documented from the earliest point possible in the project. It is therefore essential to start documenting when the project is in the discussion stages. Although for current projects, creating documentation at any point in the project is recommended.
There will not be a general audit of your company whereby CRA reviews anything more than your SR&ED claim. CRAs policy is to review only the expenses on the R&D claim. A financial reviewer may visit you, particularly if this is your first claim, to verify the expenses claimed. The science reviewer may also visit to gather more information or to clarify the technical aspects of the claim. If you are audited / reviewed, we defend your claim with CRA, at no additional cost to you.
Canadian private corporations receive a refundable tax credit (cash) and it is considered income. Publically traded companies and foreign corporations receive a credit against taxes payable which is also considered income.