What is the Scientific Research & Experimental Development (SR&ED) program?
The Scientific Research & Experimental Development (SR&ED, or 'SHRED') program is a federal tax incentive managed by the Canada Revenue Agency (CRA). It encourages Canadian businesses of all sizes and sectors to conduct research and development (R&D) to create or improve products, processes, principles, methodologies, or materials. SR&ED is the largest single source of federal support for industrial R&D in Canada.
In Alberta and British Columbia, claimants can recover up to 64% of eligible expenditures through refundable or non-refundable tax credits (for some corporations, this rate can be as low as 20%).
What are the eligibility criteria?
There are three main criteria to determine if your work qualifies as SR&ED:
- Technological Advancement. The experimental development activity must generate new information that advances your understanding of the underlying technologies. In business terms, when you create a new or improved material, device, product, or process, it must represent a technological advancement to be eligible. In other words, your work should aim to raise the technological baseline from where it was at the start of the project.
- Technological Uncertainty. Technological uncertainties are problems or unknowns that can't be solved using standard techniques, procedures, or data that are generally available to qualified professionals in the field.
- Technical Content. A systematic investigation means moving from identifying and describing the scientific or technological uncertainties, to forming hypotheses, testing through experiments or analysis, and drawing logical conclusions. In business, this means you must clearly state the objectives of your scientific research or experimental development early in the project, and clearly outline how you will address the scientific or technological uncertainty through experimentation or analysis.
What is the application process?
The SR&ED application process includes these steps:
- Identify activities or projects that qualify for SR&ED
- Develop a SR&ED claim strategy to maximize your claim
- Gather all supporting documentation for your SR&ED claim
- Prepare a technical report for each SR&ED project (as required by the CRA)
- Identify all related and eligible SR&ED expenditures
- Prepare the SR&ED tax schedules and file your claim with your corporate tax return (within 18 months after your corporate fiscal year-end)
But we don’t do research & development (R&D) work?
The SR&ED program defines research & development differently than most people expect. R&D means you are systematically trying to advance your technology while overcoming technical challenges. Most companies that apply for SR&ED aren’t competing with Google or Area 51—your work can still qualify. The CRA considers what’s publicly available (Google searches, white papers, software patterns, etc.) and your company’s context. If you can’t find a solution to your technical problem in the public domain, that’s where your SR&ED work may begin. Some technological challenges come from your unique situation, such as legacy systems or equipment. Systematically overcoming these challenges could make your work eligible for SR&ED tax credits.
What kinds of projects are eligible?
Any work done to solve a technological challenge or uncertainty—where you couldn’t find the answer in the public domain (like a Google search or white paper)—as long as it’s carried out systematically by qualified personnel (not just as a training exercise). So, whenever you’re taking a technical risk to push your technical capabilities further (to meet business needs or improve your product or process), even for a small improvement, you could qualify for SR&ED tax credits.
To qualify for SR&ED, your work must advance scientific or technological understanding, address scientific or technological uncertainty, and involve a systematic investigation by qualified personnel. Eligible work includes:
- experimental development to achieve technological advancement by creating new materials, devices, products, or processes, or improving existing ones;
- applied research to advance scientific knowledge with a specific practical goal in mind;
- basic research to advance scientific knowledge without a specific practical application; and
- support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, but only if the work is appropriate for and directly supports the eligible experimental development, applied research, or basic research.
What kinds of expenditures qualify?
Several types of expenditures can qualify as SR&ED expenses, including:
- Salaries for people directly involved in eligible SR&ED work
- Subcontractor costs for directly involved SR&ED work
- Material costs needed to achieve your technological advancements
You can also add a 55% overhead allowance (it was 65% in 2012 and 60% in 2013) to salaries to cover office and miscellaneous overhead costs
How much funding can I expect?
SR&ED Investment Tax Credit: 15% federal tax credit (was 20% before January 1, 2014) on all qualifying R&D costs for eligible activities carried out in Canada. For small Canadian-controlled private corporations, the rate increases to 35% on expenditures up to $3 million per year (see below for definition). This 35% credit is fully refundable.
Provincial SR&ED Incentives: Tax credits from 4.5% up to 37.5%, depending on your province. Some provinces offer refundable credits.
Special tax credits are available for certain industries, including IT, media, video games, and film. Enhanced credits are also available for research done by universities, research centers, and research consortia.
How long does it take to receive my funds?
The Canada Revenue Agency (CRA) has Service Level Agreements (SLAs) that set turnaround times for most claims. In our experience, most claims are processed in about two months.
The SR&ED program has these service standards for processing claims:
- refundable claims – 120 calendar days from filing
- non-refundable claims – 365 calendar days from filing
- claimant-requested adjustments to refundable claims – 240 calendar days from filing
- claimant-requested adjustments to non-refundable claims – 365 calendar days from filing
What happens if I get audited?
The CRA has a dedicated SR&ED review department with technical and financial staff who assess the technologies being claimed and determine eligibility under the Income Tax Act. These reviews focus only on your SR&ED claims—not your entire corporate tax return. Once you receive a notice of assessment, the CRA will not claw back funds in later years unless they find evidence of fraud. So, once you receive your SR&ED funds, you can be confident they won’t be taken back in the future.
If I get audited in one year, could they claw back funds from previous years?
No, each fiscal year is reviewed independently. If you received SR&ED tax credits in one year, they can’t be clawed back in later years—even if you’re found ineligible during an audit. The only exception is if the CRA finds fraudulent or illegal activity.
Is there anything that guarantees my claim?
No, there’s no guarantee your claim will be accepted by CRA reviewers if it’s selected for review. The process depends heavily on the CRA’s technical reviewer and their interpretation of the Income Tax Act. In our experience, the CRA’s eligibility criteria can be unpredictable and sometimes influenced by other factors.
Will the program ever expire?
No, the program is written into the Income Tax Act and has no set expiry date. However, the government can change or eliminate the program if they choose. Currently, the Harper government is reviewing possible changes to SR&ED, which will be announced in the coming months.
How much will it cost me?
Nothing, if you identify the qualifying SR&ED work and prepare all technical reports yourself. If you choose to work with a consultant to save time and increase your chances of a successful claim, you’ll pay a consulting fee. Most SR&ED consultants work on contingency—they only invoice you once you receive your SR&ED tax credits. This model aligns your interests. Typical consulting fees range from 5% to 25% of the tax credits, depending on the size of your claim. The larger the credit, the lower the fee percentage. Many firms also offer fixed-fee or hourly arrangements if you prefer. We work as your partner—our success depends on yours.
How much of my time will this take?
We can’t speak for other firms, but with our proven SR&ED claim preparation process, we minimize the time your staff needs to spend. We’ll only need a few hours with your technical team to understand and document the work. We’ll also work with you on an ongoing basis to reduce documentation risk and make the claim process even more efficient.
I’m a startup—do I qualify? I don’t have taxable income (I don’t pay taxes)—can I still benefit?
Yes, startups can qualify for the SR&ED program. You don’t need to be profitable to benefit from refundable tax credits. If your SR&ED claim is successful and you’re a startup, you’ll likely receive a check from the government for the credits awarded. The only requirement is that you have qualifying work and eligible expenditures to claim (such as salaries, subcontractor costs, capital, leases, etc.).
