What is SR&ED / SRED Credits?
What is SR&ED? SR&ED stands for "Scientific Research and Experimental Development." It is a Canadian government tax incentive program that rewards businesses for conducting R&D activities in the country. Canadian businesses can apply to be reimbursed for up to 70% of eligible payroll and 40% of eligible subcontract and material costs incurred during qualifying activities.
This program offers a cash refundable tax credit, meaning it doesn’t matter how much tax you pay or your revenue level. The focus is solely on how much you invest to overcome challenges and enhance your business efficiency.
What are SR&ED Program Tax Credits?
Administered by the Canada Revenue Agency (CRA) and supplemented by provincial programs, SR&ED tax credits provide compensation to companies conducting research and development work in Canada. A common misconception is that SR&ED investment tax credits are exclusive to large, technologically advanced companies performing highly complex R&D. This is far from the truth.
SR&ED can cover a wide range of businesses. Given that confronting obstacles is inherent to any business, each business has the potential to qualify for SR&ED, even failed and abandoned projects qualify. Federal government statistics reveal that over 95% of SR&ED credits are awarded for experimental development work, not classic R&D.
Unlike large or foreign-owned companies, small to medium-sized businesses in Canada, known as Canadian Controlled Private Corporations (CCPCs), receive refundable credits. Non-refundable credits can only be deducted from taxes payable, but refundable credits are paid out in cash. CCPCs receive SR&ED tax credits within 60 days of filing via direct deposit from the CRA. This is particularly beneficial for start-ups or any company without a tax balance at the end of the year.
A final piece of good news for CCPCs: your credit percentages are much larger than those for large corporations. For example, payroll expenses, which make up the bulk of most companies’ claims, earn over 65 cents in SR&ED credits per dollar of qualifying payroll. In comparison, large companies like Cisco or Shopify receive less than 28 cents per dollar of qualifying payroll.
The SR&ED tax incentives program is the largest tax credit program in Canada, distributing $4.2 billion to 20,000 companies annually. Elite Innovators Canada (ELC) are leaders in full-service SR&ED consulting. We build your claim, coordinate with your accountant, submit your claim, and ensure you receive your money with a 100% customer service focus. No excuses. Contact us for a free, no-obligation introductory consultation.
Who is Eligible for SR&ED Credits?
SR&ED eligibility is a frequently discussed topic with many nuances, especially when it comes to the edge cases of qualifying work and expenditures. We delve into this topic in detail in our eligibility guide here.
To determine SR&ED eligibility, consider the following key prerequisites:
- There must be salary, subcontractor, and/or material expenditures related to the work being claimed.
- The work being claimed must be qualifying SR&ED work or projects.
- At least 90% of the work being claimed must have taken place within Canada.
- Salary and subcontractor expenses claimed must be paid to a Canadian entity with a SIN or BN.
- The expenses being claimed must have been incurred within the previous 18 months from the fiscal year-end being filed.
Elite Innovators Canada (ELC) can help navigate these requirements to ensure your SR&ED claim is accurately prepared and submitted.
What Work Qualifies for SR&ED?
To validate an SR&ED claim, you must demonstrate that you've carried out "qualifying work." While the definition can change and become complex, it essentially means that you must have engaged in experimentation, prototyping, or even trial and error to address a "technological uncertainty." This means your project must have encountered risks and technical obstacles or unknowns that made satisfactory completion uncertain.
There are additional requirements as well. Your efforts should be a systematic investigation, and you must have some record of your work. However, the core element is the attempt to resolve a technological uncertainty.
Elite Innovators Canada (ELC) can help ensure your SR&ED claims meet these requirements by guiding you through the documentation and submission process.
Here's an important note on qualifying work: If you have a project that failed due to technical reasons, it is likely SR&ED qualifying work and can be fully claimed for payroll, materials, and any subcontract work.
If you engage in systematic testing, investigation, or work to overcome a technical problem, this is also likely SR&ED qualifying work. Elite Innovators Canada (ELC) can assist you in identifying and claiming these qualifying activities.
If you are in a technical line of business, you likely have performed some SR&ED qualifying work. Have you developed any new products or enhanced features for existing products? Have you built any prototypes? Have you developed technology to increase productivity or efficiency in your business? These activities are all indicative of SR&ED-claimable work.
SR&ED credits are claimed for work you have already completed, making SR&ED different from traditional R&D funding mechanisms like IRAP, where researchers write proposals for future work contingent on funding. A significant advantage of SR&ED is that its provisions are integrated into the Income Tax Act. This means that if you meet the funding requirements, you will receive your credits. There is no competition for funding between firms, nor is there a limited pool of money that may run out. The amount of SR&ED funding available to you is unlimited.
Moreover, an SR&ED claim is not a one-time benefit; businesses can claim SR&ED credits every year for ongoing eligible activities.
However, your ability to claim SR&ED credits is time-sensitive. Your SR&ED claim must be filed within 18 months of the end of the fiscal year during which the SR&ED work was performed. If you think you may have a claim, do not wait until the last minute to explore your options.
How Does SR&ED Work?
Here’s more information to illustrate the steps involved in claiming an SR&ED tax credit. While you can file an SR&ED claim on your own, it’s beneficial to have an expert consultant like Elite Innovators Canada (ELC) manage your SR&ED claim. SR&ED consultants work on a contingency basis, meaning they only get paid once you receive your direct deposit from the government.
What is the SR&ED Claim process?
1.The first step is determining whether your business might qualify for SR&ED funding. Scheduling an introductory call with a consultant can often provide clarity on this. There is no obligation or charge for this call. The primary requirement for SR&ED is that your business is engaged in a technical field. Businesses primarily involved in retail, legal, marketing, sales, or distribution activities are unlikely to qualify for a claim.
2.Once qualifying work is identified within the appropriate time frame, details about your work need to be gathered and organized into projects by fiscal year. A detailed write-up of your work is necessary to demonstrate how it meets the technical requirements for SR&ED qualifying work.
3.One of the final steps in preparing a claim is assigning allowable payroll, material, and subcontract expenses to your project.
4.Next, the SR&ED projects are transferred onto the proper CRA claiming forms, organized by fiscal year. If you are claiming SR&ED for a fiscal year in which you have already filed your business taxes, you or your SR&ED consultant will file the SR&ED claim as an amendment to your previously filed taxes.
5.For first-time claimants, the government schedules a site review typically a month or two after your claim is submitted. During this review, a technical and financial reviewer from the government will visit your site to learn about your business, educate you about SR&ED, and ensure your claim meets SR&ED standards. Your consultant will be with you during this review, which usually takes half a day to a full day. Ideally, your first claim is assigned FTCAS status, meaning the review is less in-depth because your claim has been pre-approved prior to the review.
6.After a successful review, your SR&ED credits will be direct deposited into your business bank account within about a month. At this time, your consultant will bill you a contingency fee based on a percentage of the cash you received.
* Many companies that successfully receive SR&ED funding from the government find that they are doing qualifying work annually. Elite Innovators Canada (ELC) works with you to make documenting your SR&ED activities part of your regular workflow. You will file SR&ED annually as part of your T2 tax return. Processing times for repeat filers are often accelerated, with turnaround times of a few weeks rather than months as in the initial claim. ELC will then work with you to strategize how SR&ED can be a key component in funding your business success and growth, incentivizing you to expand your technological expertise and undertake groundbreaking projects.