The Scientific Research and Experimental Development (SR&ED) program is one of Canada’s most significant tax incentive programs designed to encourage businesses to conduct research and development activities in Canada. Each year, the program provides over $3 billion in tax incentives to more than 20,000 claimants, making it the largest source of federal government support for industrial R&D.
What is SR&ED?
SR&ED (pronounced “shred”) is a federal tax incentive program administered by the Canada Revenue Agency (CRA) that provides financial support in the form of tax credits or refunds to Canadian businesses conducting eligible R&D activities in Canada.
The program is designed to reward companies that:
- Attempt to advance technology or scientific knowledge
- Face technological uncertainty in their development work
- Conduct systematic investigation through experimentation
- Achieve technological advancements
The Three Types of Eligible Work
According to the CRA, eligible SR&ED work falls into three categories:
-
Basic Research: Work undertaken for the advancement of scientific knowledge without a specific practical application in view
-
Applied Research: Work undertaken for the advancement of scientific knowledge with a specific practical application in view
-
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
The vast majority of claims (over 95%) fall under the “Experimental Development” category.
Who is Eligible for SR&ED?
Eligible Companies
Any business carrying out eligible SR&ED work in Canada can claim the tax incentives, regardless of:
- Business size
- Industry sector
- Ownership structure
Key eligibility requirements for businesses include:
- Must be a Canadian-controlled private corporation (CCPC), other corporation, partnership, individual, or trust
- Must have carried out eligible SR&ED work in Canada
- Must be able to document and support the systematic investigation or search
- Must incur eligible SR&ED expenditures related to the work
Note: While the SR&ED program is available across many industries, SREDWise is currently focused on serving technology companies specifically. Our platform is optimized for software development, IT infrastructure, technical product development, and related technology fields.
Key Industries That Successfully Claim SR&ED
While any industry can claim SR&ED if they meet the eligibility criteria, these sectors have high success rates:
- Software Development
- Information Technology
- Manufacturing
- Biotechnology
- Engineering
- Electronics
- Food & Beverage Processing
- Aerospace
- Agriculture
- Natural Resources
What Qualifies as Eligible Work?
For work to qualify as SR&ED, it must meet all three of the following criteria:
-
Scientific or Technological Uncertainty: The work must attempt to resolve scientific or technological uncertainties where the solution is not readily apparent to professionals in the field.
-
Scientific or Technological Content: The work must generate information that advances the understanding of scientific relations or technologies.
-
Scientific or Technological Advancement: The work must result in a scientific or technological advancement in the form of new knowledge or create new or improved materials, devices, products, or processes.
Examples of Eligible Activities
- Developing new algorithms or computational methods
- Creating new materials with specific properties
- Developing novel manufacturing processes
- Designing and developing prototype hardware or equipment
- Developing new system architectures
- Improving existing technologies beyond current limitations
- Experimenting with new approaches to solve technical problems
What Does NOT Qualify as SR&ED
The following activities generally do not qualify:
- Market research or sales promotion
- Quality control or routine testing
- Social science or humanities research
- Commercial production of a new or improved material, device, or product
- Style changes or routine data collection
- Routine software development using known methodologies
SR&ED Tax Benefits
Tax Credits Available
The SR&ED program offers different rates of tax credits depending on the type of business:
For Canadian-Controlled Private Corporations (CCPCs):
- Refundable tax credit of 35% on the first $3 million of qualified SR&ED expenditures
- Refundable tax credit of 15% on any amount over $3 million
For Other Corporations:
- Non-refundable tax credit of 15% on all qualified SR&ED expenditures
For Individuals and Trusts:
- Refundable tax credit of 15% on all qualified SR&ED expenditures
Enhanced Benefits for Small CCPCs
Small Canadian-controlled private corporations receive the most generous benefits:
- Higher tax credit rate (35%)
- Refundable credits (paid in cash even if the company has no taxes to offset)
- Full refundability on current expenditures
Eligible Expenditures
The SR&ED program allows claims for:
- Salary and wages of employees directly engaged in SR&ED work
- Materials consumed or transformed in the SR&ED work
- Subcontractor payments for SR&ED work performed on your behalf
- Overhead expenses related to SR&ED (using the traditional or proxy method)
- Third-party payments to certain entities conducting SR&ED
- SR&ED capital expenditures (for claims before 2014)
The SR&ED Claim Process
Key Steps in Filing an SR&ED Claim
- Identify Eligible Projects: Review your R&D activities to identify potentially eligible projects
- Document Your Work: Maintain contemporaneous documentation of your experimental process
- Calculate Eligible Expenditures: Determine the costs associated with eligible activities
- Complete Required Forms:
- Form T661 (Scientific Research and Experimental Development Expenditures Claim)
- Schedule T2SCH31 (Investment Tax Credit – Corporations) or Form T2038 (Investment Tax Credit – Individuals)
- File with Your Income Tax Return: Submit these forms with your regular tax return
- Respond to CRA Reviews: Be prepared to provide additional information if requested
Claim Deadline
Claims must be filed within 18 months after the end of the tax year in which the SR&ED expenditures were incurred.
Documentation Best Practices
Strong supporting documentation is critical for a successful SR&ED claim. Key documents include:
- Project planning documents
- Design documents and technical specifications
- Test protocols and results
- Laboratory notebooks or development logs
- Prototypes and samples
- Meeting notes discussing technical challenges
- Problem reports and resolution attempts
- Email correspondence about technical issues
- Time tracking records
- Photographs and videos of experimental work
Understanding the Three-Criteria Test
The CRA evaluates SR&ED claims based on what’s known as the “three-criteria test.” All three criteria must be met for work to qualify:
1. Scientific or Technological Uncertainty
This exists when knowledge available to the company does not provide a solution to a technical problem. This happens when:
- Existing knowledge is insufficient to resolve the problem
- It’s unclear whether a given approach will work or how to implement it
- Technical obstacles exist that cannot be overcome through routine engineering or standard procedures
Example: A software company trying to develop a real-time analysis algorithm for streaming data faces performance limitations that cannot be resolved using known approaches.
2. Scientific or Technological Content
The work must involve a systematic investigation through:
- Formulating hypotheses
- Planning and conducting experiments
- Testing and analyzing results
- Drawing conclusions
- Documenting the process and results
Example: A manufacturing company systematically tests different material compositions, documenting the process and results of each experiment to develop a more heat-resistant alloy.
3. Scientific or Technological Advancement
The work must generate new knowledge or create improvements that advance technology by:
- Extending understanding beyond the current state of knowledge in the field
- Overcoming technological limitations or constraints
- Creating new technological capabilities
Example: A biotech company develops a new process for enzyme production that achieves higher yields than previously possible, representing an advancement in production technology.
Common Misconceptions About SR&ED
Misconception 1: “Only lab work qualifies”
Reality: While traditional scientific research qualifies, most SR&ED claims involve experimental development in various business settings, including software development, manufacturing process improvement, and product development.
Misconception 2: “Only successful projects qualify”
Reality: Projects that fail can still qualify if they followed a systematic approach. The knowledge gained from understanding why something didn’t work is considered valuable advancement.
Misconception 3: “SR&ED is only for large companies”
Reality: Over 75% of SR&ED claims come from small businesses with less than $2 million in annual revenue.
Misconception 4: “We must develop something revolutionary to qualify”
Reality: Incremental advancements that resolve technological uncertainties can qualify, not just breakthrough innovations.
Misconception 5: “We need a dedicated R&D department”
Reality: Any employee engaging in eligible activities can contribute to an SR&ED claim, regardless of their job title or department.
How SREDWise Can Help
SREDWise simplifies the SR&ED claim process through:
- AI-powered claim preparation that saves you time and effort
- Document analysis to identify eligible activities
- CRA compliance checking to ensure your claim meets requirements
- Flat-rate pricing for predictable costs
- Self-service platform for efficient claim preparation
Our platform is specifically optimized for technology companies, helping software developers, IT firms, and tech product developers navigate the SR&ED program with ease.
Next Steps
Ready to explore your SR&ED potential? Start by:
- Reviewing your R&D activities from the past 18 months
- Gathering supporting documentation of your experimental work
- Identifying technical uncertainties you’ve faced and how you addressed them
- Creating a list of eligible projects to include in your claim
Then, sign up for SREDWise to begin preparing your SR&ED claim with confidence.
This guide provides an overview of the SR&ED program but does not constitute professional tax advice. While we strive for accuracy, the CRA’s guidelines and interpretations may change over time. We recommend consulting with a qualified tax professional for specific advice regarding your SR&ED claim.