What Does SR&ED Mean?
Science Research and Experimental Development (SR&ED) pronounced (SHRED) is a federal tax incentive program here in Canada. The Canadian government supports innovation in Canada by providing a tax incentive for innovative work performed in Canada. Research and Development work in Canada does not guarantee SR&ED eligibility as CRA has their own guidelines in relation to what constitutes SR&ED work. SR&ED is claimed at the end of each fiscal year and is administered by CRA.
SR&ED is not only for the science buffs. You can claim SR&ED for many different research and development costs.
CRA defines SR&ED as meeting the following criteria:
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?
As you can see there is some interpretation in relation to answering these questions. Your business project may not align with your R&D project and SR&ED project may also not align with an R&D project. SR&ED eligible expenses that can be claimed are typically SR&ED wages, contractors and materials that are consumed or transformed within the research.
Provinces in Canada also have different tax credits that can be utilized in coordination with SR&ED at the federal level. This can lead to up to 60% of your research costs refunded back to your company at the end of each fiscal year.
Simple SR&ED example:
Take a small company with 3 employees in NS who are actively working on developing a new model of their technology, they are selling the current model. Research and development is not 100% of the operations of the business. 1 FT researcher and 1 part time researcher. They do some work with contractors and have minimal material.
Employees are paid 40k per year
1 Full time @ 40k 1 PT @ 50% - 20k and 60k salary costs - 93k SR&ED eligible wages - 20k contractor costs directly related to SR&ED
16.95K back from NS, 29k back federally = refund of 46k
SR&ED is certainly a complicated program, we help simplify SR&ED for our clients having helped bring back over 2.5 million dollars to Atlantic Canada.