Scientific Research and Experimental Development Tax Credit Program

The Scientific Research and Experimental Development Tax Incentive Program (often referred to as simply SR&ED or SRED, pronounced "shred") provides tax incentives (in the form of tax credits and/or refund) to Canadian businesses to support applied research and experimental development

Research and development

The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...

conducted in Canada

Canada

Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

Background

Introduced in the 1980s, the SR&ED program is intended to encourage businesses of all sizes, particularly small to medium and start-up firms, to conduct applied research and development (R&D) that will lead to new, improved, or technologically advanced products, processes, principles, methodologies, or materials

Innovation

Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...

. As Canada's largest federal program in support of industrial R&D, the SR&ED program provides over $4 billion in investment tax credits (ITCs) to over 18,000 claimants each year. Of these, about 75% are small businesses.

SR&ED expenditures (already deducted against revenue) may qualify for investment tax credits (i.e., a reduction in income taxes payable), cash refunds, or both. Qualifying expenditures may include wages, materials, machinery, equipment, travel and training expenses, property taxes, utility expenses some overhead, and SR&ED contracts from the following activities:

Experimental development
Applied research
Basic research
Support work

In order to claim such expenditures, an assessment on scientific or technological eligibility of the claimed activities needs to be performed, according to three criteria :

Scientific or technological advancement: The search carried out in the experimental development activity must generate information that advances your understanding of the underlying technologies. In a business context, this means that when a new or improved material, device, product or process is created, it must embody a technological advancement in order to be eligible. In other words the work must attempt to increase the technology base or level from where it was at the beginning of the project.

Scientific or technological uncertainty: Technological obstacles / uncertainties are the technological problems or unknowns that cannot be overcome by applying the techniques, procedures and data that are generally accessible to competent professionals in the field.

Scientific and technical content: A systematic investigation entails going from identification and articulation of the scientific or technological obstacles/uncertainties, hypothesis formulation, through testing by experimentation or analysis, to the statement of logical conclusions. In a business context, this requires that the objectives of the scientific research or experimental development work must be clearly stated at an early stage in the evolution of the project, and the method of addressing the scientific or technological obstacle/uncertainty by experimentation or analysis must be clearly set out.

The Department of Finance

Minister of Finance (Canada)

The Minister of Finance is the Minister of the Crown in the Canadian Cabinet who is responsible each year for presenting the federal government's budget...

is responsible for the legislation that governs the SR&ED program, while the Canada Revenue Agency

Canada Revenue Agency

The Canada Revenue Agency is a federal agency that administers tax laws for the Government of Canada and for most provinces and territories, international trade legislation, and various social and economic benefit and incentive programs delivered through the tax system...

is responsible for its administration.

Investment Tax Credit

Federally, the maximum Investment Tax Credit

Tax credit

A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...

(ITC) depends on the company's legal status and amount of qualified expenditures for SR&ED carried out in Canada.

Canadian-controlled private corporation (CCPC): the ITC is 35% of the first $3 million in qualified expenditures, and 20% on any excess amount.
Other Canadian corporations, proprietorships
Sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits and has unlimited responsibility for...

, partnerships, and trusts: the ITC is 20% of all qualified expenditures.

In addition, each province or territory may also provide provincial or territorial tax credits (subject to a cap) to qualifying corporations carrying out SR&ED in their respective province or territory:

**Provincial / Territorial Investment Tax Credits**
Province/Territory	Rate
Alberta Alberta Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...	10%
British Columbia British Columbia British Columbia is the westernmost of Canada's provinces and is known for its natural beauty, as reflected in its Latin motto, Splendor sine occasu . Its name was chosen by Queen Victoria in 1858...	10%
Manitoba Manitoba Manitoba is a Canadian prairie province with an area of . The province has over 110,000 lakes and has a largely continental climate because of its flat topography. Agriculture, mostly concentrated in the fertile southern and western parts of the province, is vital to the province's economy; other...	20%
New Brunswick New Brunswick New Brunswick is one of Canada's three Maritime provinces and is the only province in the federation that is constitutionally bilingual . The provincial capital is Fredericton and Saint John is the most populous city. Greater Moncton is the largest Census Metropolitan Area...	15%
Newfoundland and Labrador Newfoundland and Labrador Newfoundland and Labrador is the easternmost province of Canada. Situated in the country's Atlantic region, it incorporates the island of Newfoundland and mainland Labrador with a combined area of . As of April 2011, the province's estimated population is 508,400...	15%
Northwest Territories Northwest Territories The Northwest Territories is a federal territory of Canada.Located in northern Canada, the territory borders Canada's two other territories, Yukon to the west and Nunavut to the east, and three provinces: British Columbia to the southwest, and Alberta and Saskatchewan to the south...
Nova Scotia Nova Scotia Nova Scotia is one of Canada's three Maritime provinces and is the most populous province in Atlantic Canada. The name of the province is Latin for "New Scotland," but "Nova Scotia" is the recognized, English-language name of the province. The provincial capital is Halifax. Nova Scotia is the...	15%
Nunavut Nunavut Nunavut is the largest and newest federal territory of Canada; it was separated officially from the Northwest Territories on April 1, 1999, via the Nunavut Act and the Nunavut Land Claims Agreement Act, though the actual boundaries had been established in 1993...
Ontario Ontario Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....	10%
Prince Edward Island Prince Edward Island Prince Edward Island is a Canadian province consisting of an island of the same name, as well as other islands. The maritime province is the smallest in the nation in both land area and population...
Quebec Quebec Quebec or is a province in east-central Canada. It is the only Canadian province with a predominantly French-speaking population and the only one whose sole official language is French at the provincial level....	37.5%
Saskatchewan Saskatchewan Saskatchewan is a prairie province in Canada, which has an area of . Saskatchewan is bordered on the west by Alberta, on the north by the Northwest Territories, on the east by Manitoba, and on the south by the U.S. states of Montana and North Dakota....	15%
Yukon Territory	20%

Provinces and territories may offer alternative or supplemental investment programs. Examples:

Alberta offers funding through its science and research investments grant program.
Prince Edward Island offers grants (non-repayable contributions) under various funds.
Northwest Territorie s and Nunavut provide a 15% tax credit under the Risk Capital Investment Tax Credits Act.

Changes to Form T661

For tax years ending after 31 December 2008, CRA will only accept the new 2008 version of the Form T661. Significant changes include modifications to the “Part 2 project information” section that details the scientific and technological aspects of the SR&ED projects claimed, which has been restructured from free-flowing questions to a direct question format.

In 2010, the CRA has issued a new T661 (10).

Eligibility Self-Assessment Tool (ESAT)

The ESAT is CRA’s web-based tool that is used to determine through a series of concise questions if work performed has a likelihood of meeting SR&ED requirements for funding. The ESAT is mainly intended for potential claimants in the small to medium business sector, and for those who are new to the SR&ED program.

Creation of an SRED Association

A Canadian SRED Association is currently in the works with the goal of representing and serving a network of professionals who prepare technical and financial SR&ED claims, as well as the companies conducting Research and Development. Led by a board of directors that includes some of the most respected and experienced individuals currently working in the SR&ED field, the Association will provide an inclusive and collaborative forum to promote knowledge and understanding of issues and procedures relating to SR&ED. The Association will strive to provide leadership by developing a voluntary, non-governmental professional accreditation for claim preparers, as well as regular education seminars to complement the CRA SR&ED information sessions. The Association plans to advocate on behalf of its members for policy and program efficiency at the federal and provincial level.

Financing of tax credits

Since the SR&ED program is a tax credit administered by the Canadian government, several firms provide financing of those tax credits for both pre-file and post-file claims. This allows a company expecting a claim to receive the funds much earlier than CRA process allows.

External links

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