SR&ED; in Canada: Basic Facts and Figures

SR&ED; in Canada: Basic Facts and Figures

Each year, the Canadian government gives an average of $4 billion in cash refunds and tax credits to Canadian businesses that create new products, improve and innovate the products they already manufacture, change processes and even develop their own software.

How are these companies gaining access to these much-desired funds?

About 20 years ago, the Canada Revenue Agency (CRA) developed the Scientific Research and Experimental Development (SR&ED) program in order to encourage technical development and innovation among companies in Canada. The SR&ED program offers tax credit incentives and refunds for companies that perform any kind of Research and Development in Canada. The aim of the program is to reimburse eligible companies for money that they have already spent in the most general sense, the government compensates your company for developing and improving products that you would have been working on anyway.

This doesn't sound like a bad idea, eh? But exactly how much could you get back?

Through the federal portion of the SR&ED program, if your business is a small to medium sized company operating in Canada, you could receive up to 72.1% back on eligible labour expenses that is the time spent working on creating new or developing pre-existing products and processes. And that is not all most provinces in Canada also offer a provincial tax credit; the tax credit ranges from 10% to 35%.

So how does a company know whether it is eligible to receive tax credit incentives or refunds through the SR&ED program?

There are three basic criteria for eligibility for the SR&ED program: Technical Uncertainty, Technical Advancement and Technical Content.

Technical Uncertainty assumes that there is some kind of an obstacle that prevents reaching a goal and that there is no known solution to the problem of removing that obstacle. Under this criterion, everything that is eligible for the program must go beyond the existing knowledge while removing the uncertainty.

Technical Advancement means that the uncertainty was solved, and that your knowledge and understanding of technologies used have been advanced.

Lastly, Technical Content, or Systematic Investigation, shows that some sort of scientific process was used while solving the problem of technical uncertainty.

Sounds pretty simple, right? In a nutshell, you start with a final objective that you don't know how to get to or even if you can get to it you do some experimentation to try to get to that final objective, and you come away from it all knowing more than you did before.

As easy and straightforward as it sounds, the CRA estimates that approximately 50% of companies that are eligible for the SR&ED program do not actually apply for it mainly because they don't realize that what they are doing can actually be considered Scientific Research and Experimental Development. So, ask yourself have you created a new product? Improved an already existing one? Changed a process? If you have, there's a very good chance that you're missing out on a reimbursement program that could provide your company with some much-needed cash refunds.

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