Are you wondering if your business qualifies for the SR&ED tax incentive in Canada? If so, do you know what you have to do to claim it? This SR&ED guide should answer many of your questions and concerns. Claiming the SR&ED tax credit can be complicated for beginners. It’s best to better understand what type of work can and can’t qualify before moving forward with your claim.
In this following SR&ED guide, you will learn more about the eligibility and application process of this tax incentive:
What is SRED?
The SR&ED acronym stands for Scientific Research and Experimental Development. Some will refer to it as “Shred.” SR&ED is a business incentive program that the Canada Revenue Agency manages, and its purpose is to support and reward businesses that are conducting research and development in the country. The tax incentives of this important program can be offered in the form of a refund, an income tax deduction, or an investment tax credit.
More than $3 billion in tax incentives are available for more than 20,000 businesses yearly. If your business is interested in research and technological advancement, you need to pay attention to SRED.
Different types of businesses can be eligible for the SR&ED. The program seems to focus mostly on Canadian-controlled private corporations or small businesses. Proprietorships, trusts, partnerships, and publicly listed companies are also eligible, as long as their work is conducted in Canada and is carried out in a field of science or technology and to gain new knowledge.
This doesn’t mean you need to have scientists in lab coats or a doctor of philosophy on your team to claim the SR&ED tax credit. If your team designs new products, develop new processes or conducts IT work, you could be eligible.
To qualify, your work has to be conducted in Canada, and it has to further technical knowledge and resolve uncertainties through an iterative process. Basic or applied research qualifies. Any work that aims to create or improve products, devices, processes or materials should also be eligible.
If your team is involved in engineering, design, computer programming, data collection, testing, mathematical analysis, or operations research, you should claim your SR&ED tax credit.
What is not SR&ED eligible?
A project involving scientific research and experimental development can cover various activities in various fields, and some are not eligible for the SR&ED tax incentive.
Examples of work that doesn’t qualify include:
- Market research, testing and development
- Sales promotion
- Research in social science, arts or humanities
- Routine data collection and processing
- Development of customized style elements
- Quality control or routine testing of products, devices, materials or processes
- Commercial production or improvement of a product, device, material, or process
- Routine testing and analysis of soils or atmospheres
- Prospecting, exploring or drilling for minerals, petroleum, or mineral gas
Some aspects of one of your projects may qualify for the tax credit, while others may not.
SR&ED tax credit benefits
You could use your SR&ED investment tax credit to reduce your company’s income tax payable, which could be convenient for you. If what you have to pay is less than the value of your tax credit, you will also be getting a refund.
On the other hand, you could choose to pool your SR&ED expenses and deduct them together against your income for up to 20 years in the future. If you have unused investment tax credits, you can carry them back three years. It’s up to you to decide which strategy would be the best one to benefit your business.
Over the years, more than $3 billion is provided to the innovative qualifying businesses. SR&ED is Canada’s largest incentive program and highly lucrative for applicable businesses.
How to calculate SR&ED tax credit
So, how much could you receive from the SR&ED tax credit? The answer to this question depends on the type of business you are operating and your qualifying expenses.
If your business is a Canadian-controlled private corporation, you could get an SR&ED tax credit of up to 35% of your qualifying expenses of $3 million. If your expenses are over $3 million, the rate will be 15%. Individuals, trusts, and other companies will also benefit from a tax credit rate of 15% of their eligible SR&ED expenses.
If you are certain that at least some of your work and expenses would qualify for the SR&ED tax credit, you will have to file a claim and submit it to the Canada Revenue Agency. You will need to gather documentation, including your tax returns and records, receipts, contracts, financial statements, and other documents supporting the expenditures you are claiming.
It could be a good idea to request the help of an SR&ED specialist, so you can spend less time working on your claim and more time advancing your next project.