SR&ED Basics

Overview

Scientific Research and Experimental Development Tax Refund is a government incentive program to encourage Canadian businesses to develop new or improved products or processes. The federal government pays out almost two billion dollars annually under this program.

It is estimated that for every dollar paid, two dollars go unclaimed because companies are not aware of their eligibility. This encompasses both companies that have not claimed at all in the past, and companies that are not claiming as much as they are entitled to claim.

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 processes, or improving your old ones, you are performing product development. The key question is whether this development is experimental in nature.

Program Eligibility

At the most basic level if you are developing or improving a product or process you may be eligible for SR&ED. The next step is to determine if you meet the requirements of the program during that development. The underling question is to determine was there any technological uncertainty? The best way to determine this is to look at what obstacle was there in the technology to prevent you from reaching your goal:

Were you trying to develop a technology that doesn’t exist (a flying car, AI software, a new material, etc.)?

Were you trying to push a technology beyond its limits (running a desktop application on a phone, injection molding at higher temperature than material limits, etc.)?

Were you trying to use a technology in a way it wasn’t designed to be used (converting a vertical CNC to horizontal, using a diesel engine to burn gasoline, etc.)?

Value of Returns

The return amount varies from province to province, however a quick rule of thumb is small or medium sized CCPCs will get back 50% of their costs, and large CCPCs or non-CCPCs will be get 25% of their costs.

Claim Audits

Audit rates have never been higher. Today audit rates are 25x what they were 10 years ago. The CRA is also scrutinizing the claims in much more detail. We know how to prepare the claim to minimize the likelihood of being picked up in their risk based review process. We also know the level of documentation needed to defend your claim and how to prepare for the questions the CRA will ask if your claim is selected for review.

Filing Dates

You usually file for your SR&ED refund 6 months after your year end. Most companies have a Dec 31st year end which means most companies have a filing date of June 30th. The CRA does allow you to go back and file as late as 18 months after your year end. In which cases some times we can file two years at once.