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Taking Advantage of the Scientific Research and Experimental Development (SR&ED) Tax Credit


Asking yourself these questions could save you a lot of money.

The Scientific Research and Experimental Development (SR&ED) tax credit is a valuable incentive which can provide a refundable tax credit for Canadian businesses. For example, a private company that spends $100,000 on SR&ED can earn a net after tax savings of approximately $47,000. This represents “found money” which helps improve cash flow, reduces taxes and ultimately improves the financial health of your company. SR&ED is enshrined in tax law and is one of the few tax-credit benefits widely available to private companies, partnerships, sole-proprietors, trusts or corporations. In 2008, it is estimated that over $6 billion in SR&ED tax credits were claimed in Canada; with no upper limit or funding envelope. So long as a SR&ED claim approved by CRA, the credits are available. This tax credit is your right as a tax paying business and claiming SR&ED properly will save you a lot of money.

Of course you must qualify for SR&ED. Most businesses do not understand when there is eligible SR&ED occurring within their enterprises unless a dedicated R&D department is present. Even in these cases businesses often don't recognize the breadth in which they can claim as they are focussed on doing only what they have done before. For example, a company may know to claim their dedicated R&D people but not know what supporting activities or costs may be eligible. Another example of missed opportunities is how a company remunerates its shareholder employees. Dividends and bonuses paid to shareholder employees are not eligible for SR&ED so a company must plan into shareholder remuneration appropriately. These lost costs can make a significant difference to the size of the claim. For most firms SR&ED is not a discrete function but just an every day part of operating a business. The “every day” nature of SR&ED may make it difficult to find. But ignoring this will cost you money.

I often get asked by people – “How do I know if I am doing SR&ED?” or "How do I recognize SR&ED?" Of course there is the tax policy which is more a question of judgement than a question of fact. What constitutes SR&ED depends largely on the context of the firm, its capabilities, what they are trying to achieve and how they are achieving it. We have come up with the following questions to help you determine whether you are performing SR&ED:

  • Do you operate a manufacturing business with a quality assurance function?
  • Have you developed your own software?
  • Have you often contemplated how to make, develop, or improve a product or process with no definitive answer in mind?
  • Have you ever produced any scrap materials or product prototypes from a process or machine that was not working as it should?
  • Have you ever had to do a “trial run” of your product or manufacturing process?
  • Does your shop floor staff spend time “tweaking”, “testing” or performing “trial and error” in the development of their product?
  • Have you ever had to buy a customized or “one-off” machine (or part of a machine) because you couldn’t find a suitable machine “off the shelf”?
  • Have you ever paid or contracted the development of some product, tool or you thought of as too complex or technical for your internal skill base?

If you have answered “yes” to any of the above then you may be performing qualified SR&ED. Eligibility can be determined by your technical SR&ED professional. There may also be tax planning and optimization strategies for owner-managed and smaller businesses. Speaking to a tax and SR&ED advisory professional can help you explore potential tax planning opportunities; which in turn will help optimize your SR&ED claim.

For more information please feel free to contact myself or your local MNP advisor.