The Scientific Research and Experimental Development Tax Incentive Program is Canada’s premier program to encourage Canadian technology companies to spend more on research and development activities. The SR&ED program is particularly lucrative for small business corporations, known as Canadian Controlled Private Corporations, CCPCs. These firms can get up to 70 cents back for every dollar they spend on qualifying R&D payroll. That’s the most lucrative program in the world incenting private R&D activities. Large/foreign/public companies also qualify for SRED credits but the per unit credits they receive are lower than those earned by CCPCs.
The government states that the vast majority of funding disbursed under the SRED program is for Experimental Development work, not basic R&D. This means that regular commercial and industrial companies can qualify for SRED without having scientists on staff or a formal R&D program. The key to claiming SRED funding is that the company is performing qualifying work. Experimental Development is work which uses testing, experimenting or prototyping to make progress against technological obstacles or technological unknowns. One way to distinguish ED qualifying work from routine engineering work is that there must be some risk that the work cannot be completed successfully due to a technological shortfall or unknown.
The Scientific Research and Experimental Development Tax Incentive Program is run by the Canada Revenue Agency. Tech firms apply for SRED funding ideally as part of their regular T2 filing. Alternatively, firms can apply for SRED by filing an amendment to their one or two years’ T2 filings. In all cases, SRED funding is calculated based on expenditures that the firm has already made. This differs from academic-oriented R&D grants, where researchers put in proposals for work they will carry out if they receive funding. The big advantage to SRED is that it is legislated in the Income Tax Act so the funding available isn’t a set pool. If you meet the requirements for SRED qualifying work, you will receive your funding. The CRA disburses about $3B in federal credits and approximately $1B more of provincial SRED credits every year to 20,000 Canadian firms.
The Scientific Research and Experimental Development Tax Incentive Program awards credits for qualified company spending in three areas: payroll, materials and subcontracts. Payroll is responsible for the lions’ share of SRED credits that most companies receive. How does it work? For a salaried employee, you take his annual salary and dive by the hours worked during the fiscal year. This is typically 1920 to 2000 hours. This calculation results in an hourly rate for which the employee accumulates SRED expenditures as he performs qualifying work. Firms earn SRED expenditures not just by this direct expense, but also for overhead associated with R&D activity. The vast majority of companies use a deemed calculation for overhead which is called by the CRA the proxy method. The proxy calculation multiplies all SRED payroll by a 55% figure to derive the proxy overhead amount. This uplift to payroll means that ON CCPCs earn 68 cents for every dollar of qualifying SRED payroll. Check out this G6 online calculator which gives you exact credits earned for qualifying SRED expenditures by company type and by province: https://www.g6consulting.ca/sred-calculator/
Firms also earn SRED credits for materials and subcontracts. Materials can be either materials scrapped during experiments and testing, or materials used to construct prototypes. When we claim materials, we do not include any HST but we do include shipping costs to get the material to the location where testing occurs. The third and last claimable SRED expenditure type is subcontracts. Subcontracts can be invoices to external Canadian firms whose work is necessary for the conduct of our experimental project. Subcontracts can also be payments made to contract staff who are not on our regular payroll. These contractors must perform work which is necessary to complete our SRED project.
G6 Consulting Inc has over 12 years of experience specializing in the SR&ED program. SR&ED experts such as G6 often work on a contingency basis, with payment only based on a percentage of SRED credits once received.
You can contact G6 for a free consultation here. https://www.g6consulting.ca/contact/
Learn more about SR&ED – https://www.g6consulting.ca/about-sred/
How we can help – https://www.g6consulting.ca/sred/