What Is SR&ED? Research and Development Funding 

The Scientific Research and Experimental Development (SR&ED) program is a Canadian tax incentive program developed to encourage businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. The SR&ED program allows businesses to reduce tax liability in the current year or a future year. These tax incentives come in three forms: an income tax deduction, an investment tax credit (ITC), and, in certain circumstances, a refund. 

Each year, the Canada Revenue Agency (CRA) processes approximately 22,000 SR&ED claims, providing more than $4 billion in federal ITCs to Canadian businesses. 

SR&ED is the largest single federal program supporting business-led R&D in Canada. This article will dive into how the program came to be, who is eligible to utilize this program, and how to benefit from it to support your R&D activities. 

What Is R&D Defined As? 

The Frascati Manual, a document published by the Organisation for Economic Co-operation and Development (OECD), has provided internationally accepted definitions of “research and development” to more accurately compare R&D efforts made in various countries. The coordinated efforts among and beyond the OECD countries to define and implement the recommendations in this manual have resulted in a valuable source of evidence for science, research, and economic policymakers.  

The Frascati Manual defines research and development as the “creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge.” 

While the Frascati Manual provides an international framework, SR&ED eligibility is determined based on definitions and criteria set out in the Canadian Income Tax Act and interpreted by the CRA. 

How Did the SR&ED Program Start? 

Since 1985, the Canadian government has used the Income Tax Act to stimulate R&D initiatives through the SR&ED incentive program, basing the definition of R&D on the Frascati definition. The CRA is responsible for delivering the program; however, the Department of Finance makes the laws. 

The Income Tax Act defines SR&ED as “a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…to advance scientific knowledge (basic or applied research) or to achieve technological advancement (experimental development) for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto…” 

The SR&ED incentives program is specific to Canadian taxpayers/businesses; however, most OECD countries have a similar type of R&D incentive program. Canada’s is among the most generous of these programs globally. 

Who Can Claim SR&ED Tax Credits? 

Companies that conduct business in Canada can claim SR&ED if the work performed meets the eligibility requirements, the work is related to their business, and expenditures are incurred. These include Canadian-controlled private corporations (CCPCs), public corporations, partnerships, and other corporations.  

Refundability and credit rates vary depending on claimant type, including whether the company qualifies as a CCPC. 

How Much Can You Receive Through SR&ED? 

The federal SR&ED program provides: 

• A 35% refundable ITC on up to $3 million of qualified expenditures for eligible CCPCs (subject to taxable capital thresholds) 
• A 15% nonrefundable ITC for other corporations 

Unused credits may be carried back three years or forward up to 20 years. Many provinces offer additional SR&ED incentives that can significantly increase total recoverable amounts. 

What Activities Are Eligible for SR&ED Tax Credits? 

Work that may qualify for SR&ED includes: 

• Basic research: work undertaken for the advancement of scientific knowledge without a specific practical application 
• Applied research: work undertaken for the advancement of scientific knowledge with a specific practical application 
• Experimental development: 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 
• Support work: engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research that supports the categories above 

Please note: Work must address scientific or technological uncertainty and be carried out through a systematic investigation or search. 

In determining eligibility, you need to address why the work was undertaken (for the purpose of achieving a scientific or technological advancement) and how the work was conducted (systematic investigation).  

What Are the Timelines for Filing SR&ED Claims? 

SR&ED claims must be filed within 18 months of the end of the tax year in which the eligible expenditures were incurred. The prescribed forms must be submitted with the applicable income tax return. Upon funding approval, your SR&ED ITCs may be refundable in cash, applied against current taxes payable, carried back up to three years, or carried forward for up to 20 years, depending on your claimant type and available tax position. 

Apply for SR&ED Funding 

The SR&ED program has a reporting deadline of 18 months from the end of the tax year in which the qualifying expenses were incurred. For application assistance, please connect with our SR&ED consultant team to determine whether your business is eligible for benefitting from the SR&ED tax credit. 

Depending on claimant type and province, eligible businesses may receive combined federal and provincial tax credits covering a significant portion of labour, contractor, material, and overhead costs. For qualifying CCPCs, refundable federal credits can reach 35% of eligible expenditures, with additional provincial incentives available in many jurisdictions.  

We’ve put together a free SR&ED 101 guide that you can download to learn more about how you lower your R&D project costs.