Overview - SR&ED program in Canada
SR&ED Program Overview.
Written by Matt Zarowny, Managing Partner, Robert Matthews Consulting
The SR&ED tax credit program is the largest federal government program that funds R&D and innovation in Canada, and is designed to encourage all businesses, regardless of their size or industry, to conduct R&D in Canada that will lead to new, improved or technologically advanced products or processes, as well as an increase in scientific or technological knowledge. In recent years, approximately 20,000 to 25,000 companies have been claiming SR&ED annually, with total benefits in the range of $3.0 - 3.5B annually.
There have been many changes to the SR&ED program over the years since it’s inception in 1985, however the core criteria or definition as to what projects and work constitutes SR&ED has not changed. Although the SR&ED program is administered by Canada Revenue Agency at the Federal level; most provinces also offer additional tax credits for qualified companies under the program.
SR&ED Program Eligibility Criteria
For a project to be considered eligible, you must be able to answer yes to these 5 questions:
Was there a scientific or a technological uncertainty?
Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
Was a record of the hypotheses tested and the results kept as the work progressed?
We will work with you to help you interpret these questions, and help you to understand what internal documentation can be used to support your claim.
Essentially – if your project has technological uncertainty; and you attempt to overcome these uncertainties through experiments, analysis, and iterative development in a systematic fashion (as opposed to just trial and error); and you keep documentation to support your work; and at the end of your project your company has improved it’s knowledge/capabilities, then it would very likely qualify for SR&ED.
Typical Indicators of SR&ED activity
New product or process development: includes new software products/apps, hardware, chemical processes, mechanical products or systems, and much more.
Patents (Patent applications or work to overcome limitations imposed by existing industry patents)
Integration Issues; or challenges with integration of sub-components into a system
Development of device drivers or firmware
Application Development / Integration
Activities to improve reliability and security of existing products
Development iterations to product design, framework, algorithms
High scrap/waste rates with manufacturing process, or change in key metrics, e.g. yield, processing time.
SR&ED Program Eligible Expenditures
Salaries or Wages from personnel “directly engaged” in the SR&ED process/project.
Materials (Consumed or Transformed)
Contracts or Third Party Payments to perform SR&ED in Canada (80% of these costs are eligible as qualified expenditures)
Overhead Costs - Traditional Method or Proxy Method (55% of Directly Engaged wages)