The biggest funding source for innovation in Canada stems from the Scientific Research and Experimental Development (SR&ED) program. Every year, billions in funding are given to thousands of businesses through the SR&ED program administrated by the CRA.
SR&ED targets innovation in Canada. It is a program designed to support Canadian-owned businesses and help Canada remain competitive globally in the category of innovation. SRED also helps stimulate the economy, create jobs, and support Canadian-based scientific and technological advancement.
For businesses engaged in innovation and overcoming scientific or technological challenges, the SR&ED program is excellent. It’s worth applying for SR&ED. Here is how SR&ED works and why you should use it.
How SR&ED Works
How an SR&ED project works is that it must be built around a scientific or technological uncertainty that existing knowledge or solutions do not resolve. This is the bedrock on which innovation is performed. The basis for a project must be proven in your SR&ED application, highlighted in the project description and supported with documentation.
Unlike other tax credits, government support programs, and research and innovation funding, there is no cap on the SR&ED program. Assuming a project meets the criteria for SR&ED eligibility, it’s entitled to receive the full benefit it’s owed. Benefits to a Canadian-controlled private corporation are delivered through investment tax credits (ITCs) and a cash refund.
Here are some common questions and answers about SR&ED:
What does SR&ED include?
To understand what expenses can be compiled under SR&ED, a percentage of salaries and wages, materials consumed, subcontracting fees, and overhead costs can all be included. Exact percentages of how much of these items one can be reimbursed depending on the type of corporation applying and where in Canada they are applying as it relates to provincial rates for SR&ED.
Who can claim SR&ED tax credits?
A primary qualifier for SR&ED tax credits is that the work must be performed in Canada. Under this rule, any party can apply. This includes Canadian-controlled private corporations (CCPCs), public corporations, partnerships, and foreign-owned corporations. In addition, the work performed must be related to the business, and there must be adequate documentation outlining expenditures.
Why apply for SR&ED funding?
R&D projects are costly. Furthermore, the result you want is not always what you arrive at. A business leaves money on the table by not applying for SR&ED tax credits. Eligible businesses can receive thousands of dollars in reimbursements and lower their tax bill owing at the end of the year.
How do you apply for SR&ED tax credits?
It’s not a fairly advanced application to make an SR&ED claim. However, it can be quite detailed. Here is what to expect with your application.
- All eligible SR&ED activities and projects must be identified, including duration or amounts.
- All related documentation must be assembled and kept in case they are needed to verify your claims.
- A technical report is prepared for each SR&ED project. If there are multiple projects, multiple reports must be prepared.
- All related and eligible SR&ED financial expenditures must be identified and calculated.
- Ensure the SR&ED tax schedule is complete before submitting it. You may want to consult with an SR&ED expert before providing your claim to the CRA.
When do you apply for SR&ED?
An SR&ED claim must be filed 18 months after the conclusion of the year in question. The forms for SR&ED are typically filed alongside one’s income tax claims. The CRA aims to approve or deny SR&ED claims within 60 days after receiving them. Occasionally, your claim may be selected for review, or the applicant will be requested to submit additional documentation.
Federal Tax Credit Rate for SR&ED
While there is no cap on what you can receive, the tax credit rate does vary depending on corporation type and income. For a CCPC, the maximum tax credit rate for their first $3 million in eligible expenditures is 35%, all of which is refundable.
After the $3 million threshold, the rate drops to 15%. If a foreign-controlled corporation applies, a flat tax credit rate of 15% applies to all expenditures, none of which is refundable.
After SR&ED Claim
After the CRA receives an SR&ED claim, they will verify it is complete. You will be notified with further instructions if it’s not completed or selected for review. If the claim is complete, it will be reviewed by technical and financial officers to confirm eligibility and the reimbursement you will receive.
The work must meet the technical definition of SR&ED, and the costs associated with the project must be considered allowable expenditures. From there, a Notice of Assessment is provided.