Software development is a growing industry in Canada, and many companies are curious whether they can receive R&D tax credits for the work they are doing. The CRA administers R&D tax credits in Canada through the Scientific Research and Experimental Development (known as SR&ED or SRED) program.

SR&ED is a longstanding Canadian government grant program that incentivizes Canadian businesses to conduct R&D work in Canada. The SRED program awards 4 billion dollars annually to over 20 thousand businesses in Canada. SRED is built right into the Income Tax Act; therefore, funding from the program is a right for businesses conducting qualifying R&D work such as software development. The SR&ED program is often misunderstood by businesses who assume that its label as a “tax credit” program means that you can only claim SRED credits against a tax balance. While this is true for public companies, for private Canadian companies, SRED funding comes directly to the business as a cash direct deposit as soon as the claim is approved.

SRED awards money to businesses based on expenditures incurred while performing qualifying R&D work such as software development. At the conclusion of the fiscal year, we look back at all the qualifying R&D work you performed in that year and assign expenses to that work. For software development, these expenses could be payroll and/or subcontractor expenditures. A private Canadian business receives 70 cents on the dollar from the government for qualifying payroll expenses, and about 40 cents on the dollar for subcontractor expenses that we can assign to the R&D work.

R&D Tax Credit Guidelines for Software Development

For software development to qualify as R&D work under the SR&ED program, there are some basic guidelines:

• First, the government is interested in paying companies for conducting R&D in a field where the company is proficient. For example, a manufacturing company that wants to develop a custom CRM for internal use will not qualify for SR&ED because they are not considered to have software expertise. In contrast, a software company developing new software is looked at much more favourably under the SRED program.

• Second, the software development work that is being undertaken must be experimental. In other words, we can not make a claim for “routine coding.” We need to claim R&D tax credits for software development work that is undertaken to achieve a technological advancement against a technological unknown. A good rule of thumb is that if there is a chance of failure in your software development work, that work qualifies for SRED.

One significant advantage of the SRED program to keep in mind is that once we can identify SRED qualifying work in software development, we can then claim routine coding and other support work. We are not restricted to claiming only the salaries of those on the cutting edge of the development effort. We can also claim SRED for all employees whose work is necessary to develop the software. In many cases, we can claim large amounts of entry-level coding staff for SRED, as to test new software, we need first to build the minimum viable product set.

G6 Consulting is a firm that specializes in preparing and filing SR&ED applications for software development companies. For software development SR&ED claims, we employ an expert with a BSc in Physics from U of Toronto and an MSc in Computer Science from Carnegie Mellon University. This individual has written hundreds of SRED technical reports extending to the early 1990s. G6 works on a contingency basis, and we only get paid when you get your money from the government. Reach out to us today to learn more about R&D grants for software development.