The benefits of SR&ED tax incentives

The benefits of the SR&ED tax incentive Program are twofold. First, it lets you deduct SR&ED expenditures from your income for tax purposes. Second, it provides you with an SR&ED investment tax credit (ITC) that you can use to reduce your income tax payable calculated under Part I of the Income Tax Act, if any. In some cases, the remaining ITC can be refunded.

The deduction of SR&ED expenditures from income

In computing the income from the business for the tax year, a taxpayer carrying on a business in Canada can deduct SR&ED expenditures in line with the provisions of the Act.

A taxpayer is considered to be a person, which can be an individual, a corporation, or a trust. A partnership is not a person, however, for tax purposes; a partner’s income from a partnership is calculated as if the partnership were a person.

Who can claim the incentives

Canadian-controlled private corporations

Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable ITC at the enhanced rate of 35% on qualified SR&ED expenditures, up to a maximum threshold of $3 million. This 35% ITC is 100% refundable on qualified SR&ED expenditures and 40% refundable on qualified SR&ED capital expenditures incurred before 2014.^[1]

A CCPC can also earn a non-refundable ITC at the basic rate of 15%^[2] on an amount over the $3 million threshold.

A CCPC that meets the definition of a qualifying corporation can earn a refundable ITC at the basic rate of 15%^[2] on an amount over the $3 million threshold, of which 40% can be refunded.

Other corporations

Other corporations can earn a non-refundable ITC at the basic rate of 15%^[2] on qualified SR&ED expenditures. The ITC can be applied to reduce tax payable.

Individuals and trusts

Individuals (proprietorships) and trusts can earn a refundable ITC at the basic rate of 15%^[2] on qualified SR&ED expenditures. The ITC must be applied against tax payable and the remaining ITC can be refunded, up to a maximum of 40%.

Members of a partnership

Since a partnership is not a taxpayer, it cannot earn an ITC. In general, the ITC is calculated at the partnership level then allocated to eligible members (individuals, corporations, or trusts), but not necessarily to all members. If you are considering submitting a partnership claim for SR&ED, we encourage you to read the SR&ED Claims for Partnerships Policy.

What work qualifies for SR&ED tax incentives

To qualify, the work must meet the definition of scientific research and experimental development (SR&ED) in subsection 248(1) of the Income Tax Act. Our Eligibility of Work for SR&ED Investment Tax Credits Policy explains how to identify work that meets the following definition of SR&ED:

“scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:

(a) basic research, namely work undertaken for the advancement of scientific knowledge without a specific practical application in view;

(b) applied research, namely work undertaken for the advancement of scientific knowledge with a specific practical application in view; or

(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto;

and, in applying this definition in respect of a taxpayer, includes:

(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,

but does not include work with respect to

(e) market research or sales promotion;

(f) quality control or routine testing of materials, devices, products or processes;

(g) research in the social sciences or the humanities;

(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas;

(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process;

(j) style changes; or

(k) routine data collection.

You can also read a brief history of the definition of SR&ED as per the Income Tax Act, as well as a brief history of the guidance on the eligibility of work.

Calculating your SR&ED expenditures and investment tax credit

If you have done work that qualifies for SR&ED tax incentives, you can claim the following expenditures:

• SR&ED salary or wages
• Expenditures for materials for SR&ED
• Contract Expenditures for SR&ED Performed on Behalf of a Claimant (policy)
• SR&ED Lease Expenditures (policy), if the expenditure was made before 2014
• SR&ED overhead and other expenditures (traditional method only)
• Third-party payments
• SR&ED capital expenditures, for property acquired and available for use prior to 2014.

To calculate your SR&ED expenditures, you have to choose between the traditional method and the proxy method. The traditional method involves claiming all of the SR&ED overhead and other expenditures you incurred during the year. The proxy method involves calculating a substitute amount for overhead and other expenditures, called the prescribed proxy amount.

Expenditures incurred for SR&ED carried on in Canada are accumulated in a pool of deductible SR&ED expenditures. Contract payments, non-government assistance and government assistance, such as research and development tax credits from the provinces or territories, will reduce the pool of deductible SR&ED expenditures and the total qualified SR&ED expenditures. You can calculate your ITC based on the total qualified SR&ED expenditures for investment tax credit purposes.

When capital property acquired before 2014^[1] is used for both SR&ED (more than 50%) and commercial work, you can claim a partial ITC for shared‑use equipment. If you change the use or dispose of a property that generated an ITC, the ITC recapture rules will reverse all or part of the ITC earned by adding an amount to your tax payable for the year in which the sale or conversion to commercial use of an SR&ED property takes place.

If you are making a partnership claim for SR&ED, please refer to the SR&ED Claims for Partnerships Policy.

Making your claim

To make an SR&ED claim, you must file an income tax return along with the following prescribed form:

• Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim (the T4088 – Guide to Form T661 is available to help you complete this form)

and one of the following forms:

• Form T2SCH31, Investment Tax Credit – Corporations, or
• Form T2038(IND), Investment Tax Credit (Individuals).

For more information on making an SR&ED claim, see the SR&ED Filing Requirements Policy or contact your local coordinating tax services office.

Be sure to file the applicable forms by your SR&ED reporting deadline. For a complete list of SR&ED forms, see our All related publications page.

Supporting documentation needed

Appendix 2 of Guide T4088 explains which documents and other evidence you need to support your scientific research and experimental development claim.

If your SR&ED claim is subject to review, you will be asked during the review process to provide this evidence. Generally, the best evidence is that which was generated as the SR&ED work was being carried out. If you do not have supporting evidence, your SR&ED claim will likely be disallowed.

Examples of technical and financial supporting evidence are:

• Project planning documents
• Documents on design of experiments
• Experimentation plan
• Design documents and technical drawings
• Project records, laboratory notebooks
• Design, system architecture and source code (software development)
• Records of trial runs
• Project progress reports
• Minutes of project meetings
• Test protocols, data, results, analysis and conclusions
• Final project report or professional publication
• Photographs, videos
• Prototypes, samples
• Scrap, scrap records
• Contracts, lease agreements
• Records of resources allocated to the project, time sheets, activity records, payroll records
• Purchase invoices and proof of payment
• Accounting records.

Note
This list is not comprehensive. You should keep any documentation that you feel will support your claim.

Filing your claim

To apply for SR&ED tax incentives, you must file the applicable prescribed forms with your income tax return by your SR&ED reporting deadline. For corporations, the reporting deadline is 18 months from the end of the tax year in which you incurred the expenditures. Individuals have 17.5 months. If you do not report an expenditure and provide project information on the prescribed forms by your reporting deadline, you will not be able to include the amounts in your pool of deductible SR&ED expenditures to use to reduce your income. You will not be able to earn an ITC on these expenditures.

How your claim is processed

1. When you file your claim with your tax return, the tax centre will check it for completeness and will determine if it can be processed as filed without further review. If we can process your claim without any further review, the tax return will be assessed as filed.
2. If it is determined that a review is needed, we will forward it to a coordinating tax services office (CTSO) for further review.
3. The CTSO’s technical and financial reviewers will review the claim and will ensure that you get the SR&ED investment tax credit to which you are entitled.
4. The technical reviewer evaluates the claimed work to determine whether it meets the definition of SR&ED.
5. The financial reviewer examines the costs associated with your claimed work to make sure that they are allowable SR&ED expenditures.
6. The claim is then assessed and a Notice of Assessment is sent to you.

Expediting your claim

To expedite your claim and receive your tax credits in a timely manner, it helps if you:

• identify on Form T661 a technical contact person in your company who was involved in the SR&ED work;
• identify on Form T661 a financial contact person in your company who understands the expenditures being claimed;
• maintain the technical and financial documents needed to substantiate the claim and make them available if requested;
• respond in a timely manner to requests from CRA for more information; and
• contact the CRA’s technical and financial reviewers if you need to clarify information requested.

How long it takes to process your claim

Please refer to the service standards that we are committed to meet.

Preparing for an SR&ED review of the work described in your claim

The SR&ED Technical Review: A Guide for Claimants provides an overview of the claim review process to help you to better prepare for an SR&ED review of the work performed in the year. In particular, it:

• summarizes the steps that a research and technology advisor (RTA) is expected to follow when doing a technical review of a claim that has been selected for a detailed technical review;
• outlines how RTAs will work with claimants and how claimants can work with RTAs during the review process; and
• identifies best practices that claimants and RTAs can use to make the review process easier.

For detailed information on the review process, please see the SR&ED Technical Review: A Guide for Claimants or contact your local coordinating tax services office.

Resolving your concerns before the CRA completes its SR&ED review

If you have concerns during the review, follow the procedures in our Guidelines for resolving claimants’ SR&ED concerns.

The review process

Your claim can be subject to a detailed technical and financial review by the CRA to ensure that it meets the requirements of the Income Tax Act.

The CRA’s research and technology advisors and financial reviewers work as a team to ensure you get the SR&ED investment tax credit you are entitled to receive.

The research and technology advisor evaluates the claimed work to determine whether it meets the definition of SR&ED. The financial reviewer looks at the costs associated with the claimed work to ensure they are allowable SR&ED expenditures.

The review may involve a visit to your place of business by CRA reviewers. During this visit, the CRA reviewers will speak with your technical and financial staff directly involved in the SR&ED claim and review documentation and other supporting evidence that substantiate your claim.

All information provided to the CRA reviewers is held in the strictest confidence. Legislative provisions and stringent rules protect the confidentiality of all claimants’ records.

^[1] Expenditures of a capital nature or expenditures for the right to use capital property (lease) do not qualify for SR&ED tax incentives if incurred after 2013.

^[2] The basic SR&ED ITC rate was reduced from 20% to 15% effective January 1, 2014. For tax years that straddle January 1, 2014, the reduction in the basic ITC rate is pro-rated based on the number of days in the tax year that are after 2013.