What is SR&ED? / What Qualifies for SRED in Canada?

SR&ED stands for Scientific Research and Experimental Development. According to the Canadian income tax act, scientific research and experimental development is defined as “a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis”

SR&ED can fall into one of three categories:

1. Basic research – This is work that a business does to advance scientific knowledge that does not have a practical application in view (very rare)
2. Applied research – This is work that a business does to advance scientific knowledge that does have a practical application in view (somewhat rare)
3. Experimental development – This is work that a business does to achieve technological advancement for the purpose of creating new materials, devices, products or processes or for the purpose of improving existing materials, devices, products or processes. (common)

Experimental development is by far the most commonly claimed category of SR&ED, representing over 90% of all claims

What is the SRED Grant?

The SRED grant refers to the refundable tax credits that are awarded to businesses for conducting SR&ED-qualifying work in Canada.

The technical term of referring to SR&ED as a “tax credit” can be misleading to many prospective claimants because it implies that SRED is merely a “credit” against taxes payable and that you would need to have a sufficient tax balance in order to benefit from SR&ED.

The reality is, that unless you have an outstanding tax balance with the CRA, SR&ED money is refunded to businesses in the form of a cheque or direct deposit from the CRA. Moreover, there are no conditions to how a business must use this money.

It is for these reasons that SR&ED is often referred to as a grant rather than a tax credit.

How Does the SRED Grant Work?

SRED grants are distributed in arrears based on expenditures incurred while doing qualifying work. In other words, SRED grants are not given because you plan to do the work but instead awarded to offset expenditures already incurred when you did the work.

SR&ED grants can be significant. Small and medium-sized businesses in Canada can receive up to 70% of salary expenditures and 40% of qualifying subcontractor and materials costs incurred while conducting a SR&ED project back in the form of a SR&ED grant.

You can use this SR&ED Calculator to estimate the credits your business may qualify for

How to Apply for a SR&ED Grant

There are two ways to apply for a SR&ED grant;

Method 1) With your Corporate Income Tax Return (T2)

The first way to apply for a SR&ED grant is with your T2 corporate income tax return. In this case either you or your SR&ED consultant complete the SR&ED forms; these include the T2 schedule 31, T2 schedule 32 (T661), T2 schedule 60 (T661 part 2), and related provincial forms and then send them to your accountant to integrate with the rest of your corporate income tax return before you file.

Method 2) As an adjustment to your Corporate Income Tax Return (T2)

The second way to a SR&ED grant is as an amendment to your T2 corporate income tax return. In this case either you or your SR&ED consultant complete the SR&ED forms and mail them to the CRA for review. This can be done up to 18 months after your fiscal year end for any given fiscal year.

Frequently Asked Questions

Who Qualifies for SRED?

Any corporation, proprietorship, partnership, or trust can apply for SR&ED; however, only Canadian Controlled Private Corporations will receive refundable tax credits, making SR&ED, in essence, a grant for small and medium-sized enterprises in Canada.

What can be Claimed on SRED?

The most common type of expenditures that are claimed for SR&ED are the salary of employees involved in the SR&ED project, and materials and subcontractor expenses related to the SR&ED project.

How much can you get from SR&ED?

The size of your SR&ED claim is based on the expenses that you incurred while doing SR&ED work. The government will rebate you for up to 70% of the salary of employees while involved in the SR&ED project and up to 40% of other expenditures incurred during the SR&ED project. 

How far back can you claim SR&ED?

You can claim SR&ED money for expenditures incurred up to 30 months into the past.

More information about SR&ED

The above post has been simplified to provide a concise overview about the SR&ED grant, for a more in-depth view check out our full SR&ED guide here