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Maximize Returns with SR&ED Eligible Expenditures Guide

The Canadian government is committed to supporting the growth of science, technology, and innovation in the country. As part of this initiative, the Scientific Research and Experimental Development (SR&ED) program provides tax incentives to businesses investing in R&D activities. This program allows companies to claim tax credits on eligible expenses, helping to offset the costs associated with these activities. In this article, we’ll explore the types of expenditures that qualify for SR&ED tax credits and how companies can maximize their potential returns.

What is SR&ED?

The SR&ED program is a federal tax incentive initiative designed to encourage Canadian businesses of all sizes and industries to invest in research and development projects. Through this program, companies can recoup a significant portion of their R&D costs in the form of tax credits, reducing the financial risks associated with innovation.

There are three main types of activities that qualify for SR&ED tax incentives:

  • Basic research – Work undertaken to advance scientific knowledge without a specific practical application in view.
  • Applied research – Work undertaken to advance scientific knowledge with a specific practical application in view.
  • Experimental development – Work undertaken to achieve technological advancements to create new or improve existing materials, devices, or processes.

Overview of SR&ED Eligible Expenditures

To benefit from the SR&ED program, companies must invest in R&D activities that meet the above criteria and must incur specific costs during the course of these projects. These costs, known as SR&ED eligible expenditures, can be grouped into four main categories:

  • Salaries and wages – This includes the cost of paying employees who are directly involved in the R&D activities. The salaries and wages paid to employees for performing SR&ED work can be claimed for up to 100%.
  • Materials – Material costs used in the R&D process, such as raw materials, may be included in the eligible expenditures. These materials must be directly involved in the SR&ED project and must be consumed or transformed during the course of the research.
  • Subcontracts – Costs related to subcontracting part of your R&D activities to a third party can be claimed. However, it’s essential to ensure that the subcontractor’s work also qualifies under the SR&ED program to claim their portion.
  • Overhead and other expenditures – This section can be more complex and may include costs such as rent, utilities, and other indirect expenses reasonably attributable to the R&D activities. Two methods can be applied to calculate these costs: the traditional method or the proxy method, each with its associated rules and regulations.

Maximizing SR&ED Tax Credits

For businesses to maximize their potential tax credits under the SR&ED program, it’s essential to have a clear understanding of the eligible expenditures and the process of filing a claim. Here are some tips for maximizing SR&ED tax credits:

  • Thoroughly document R&D activities – A detailed and well-organized record of R&D work is critical in successfully claiming tax credits. This documentation should include clear descriptions of the activities, objectives, methodologies, and any challenges encountered.
  • Claim all eligible expenses – Companies must ensure that they claim all eligible expenditures related to their R&D work. This may require an in-depth review of the project’s accounts and finances, as well as a careful assessment of the activities performed.
  • Stay up-to-date with the SR&ED program – The program requirements may change over time, reflecting shifts in government policy and priorities. Staying informed on the latest program updates and required procedures can help businesses submit accurate claims, reduce the likelihood of audits, and ensure access to the maximum tax credits.
  • Seek expert assistance – Research-intensive companies may benefit from working with specialized SR&ED consultants who can help identify eligible expenses, prepare thorough documentation and ensure a successful claim submission.

In conclusion, understanding SR&ED eligible expenditures and their various categories is crucial for Canadian businesses to maximize available tax credits. Companies must diligently track, document and claim these costs to benefit from the government’s support. By recognizing the eligible expenses and leveraging expert assistance, businesses can better support their R&D activities and promote innovation within Canada. 

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