If your company invests in research and development (R&D), you might be eligible for Scientific Research and Experimental Development (SR&ED) tax incentives. This Canadian federal program allows businesses to claim tax credits, reduce taxable income, and receive refundable tax credits for qualifying R&D work.
While many Canadian businesses claim SR&ED tax credits each year, understanding how to calculate your claim and maximize your tax benefits can be complex. This guide walks you through who qualifies, what expenses you can claim, and how to calculate your SR&ED tax credits step by step.
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But First... What Is the SR&ED Tax Incentive?
SR&ED is a tax credit program encouraging companies to invest in innovation and technological advancements. It provides financial support to businesses conducting scientific research and experimental development in Canada.
Your company may be eligible to:
Claim a deduction against income for eligible SR&ED expenditures.
Earn an investment tax credit (ITC) to reduce your corporate tax payable.
Receive a refundable ITC, meaning you can receive cash back even if your company has no tax payable.
The program applies to businesses in various industries, including technology, manufacturing, life sciences, and software development. Your work might qualify if your company is creating new processes, improving products, or solving technical challenges.
How to Calculate Your SR&ED Claim
To determine how much your business can claim, you’ll need to calculate your allowable expenditures and qualified SR&ED expenditures.
Step 1: Identify Your Allowable SR&ED Expenditures
Your allowable expenditures represent the total amount you spent on eligible SR&ED work during the tax year. These costs must be directly related to scientific research and experimental development activities.
The key categories of allowable SR&ED expenditures include:
Salaries and wages for employees engaged in SR&ED.
Materials used in R&D projects.
Contracts for SR&ED work performed by third parties.
Overhead and other expenditures (if using the traditional method).
Third-party payments for approved research institutions.
Step 2: Choose a Calculation Method – Traditional or Proxy
When calculating your SR&ED claim, you must choose between two calculation methods:
Traditional Method
Requires you to track and calculate all overhead expenses related to SR&ED.
This method may benefit if your overhead costs exceed the standard proxy amount.
It is best suited for businesses with internal indirect cost-tracking systems.
Proxy Method
Uses a prescribed substitute amount (Proxy Amount) instead of itemizing overhead.
It simplifies the process but may limit overhead deductions.
Ideal for companies that want a streamlined approach to claiming expenses.
Once you select a method, you cannot change it for that tax year.
Step 3: Breakdown Your SR&ED Expenditures
Salaries and Wages
One of the largest SR&ED claim components is employee salaries. You can claim the portion of wages directly related to R&D work.
Directly Engaged Employees: Salaries of employees actively conducting SR&ED (engineers, developers, scientists).
Support Staff: If using the traditional method, you may claim the salaries of staff indirectly involved in R&D (admin, IT support).
Overhead Costs: If using the proxy method, overhead salaries are covered under the prescribed proxy amount.
Materials Consumed or Transformed
Materials are eligible if they are:
Consumed: Fully used during the R&D process (e.g., chemicals used in lab testing).
Transformed: Incorporated into a prototype or experimental product.
The cost includes:
The purchase price of materials.
Transportation and preparation costs to make them suitable for R&D.
If materials are later sold or reused, they may not be eligible for the claim.
Contract Payments for SR&ED Work
If your company hires third-party contractors for SR&ED, you may claim some or all of the payments, depending on the relationship:
Arm’s Length Contractors – Payments qualify for ITC and deductions.
Non-Arm’s Length Contractors – Payments may qualify only as deductible expenses, not ITC.
Make sure to document all contracts and invoices to support your claim.
Overhead and Other Expenditures
Traditional Method: You must track and allocate specific indirect costs related to R&D.
Proxy Method: You apply a substitute overhead amount instead of calculating direct expenses.
Choosing between these methods depends on whether your actual overhead costs exceed the prescribed proxy amount.
Third-Party Payments
You can claim payments to universities, research institutions, or industry research organizations for R&D work.
These payments must be for SR&ED work directly benefiting your company.
Form T1263 (Third-Party Payments for SR&ED) is required when filing.
Step 4: Calculate Your Investment Tax Credit (ITC)
After determining your allowable expenditures, you can calculate your SR&ED Investment Tax Credit (ITC).
15% ITC: Available to all corporations towards eligible R&D expenses.
35% ITC: Available to Canadian-controlled private corporations (CCPCs) on the first $3 million of eligible costs.
Refundable ITC: Some businesses, especially smaller CCPCs, can receive cash back for unclaimed ITC.
For example:
If your company spends $500,000 on SR&ED and qualifies for the 35% refundable ITC, you could receive $175,000 in tax credits.
Step 5: Report and Submit Your Claim
Forms Required for Filing
To claim SR&ED tax incentives, businesses must complete and submit:
Form T661 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim.
Schedule T2SCH31 – Investment Tax Credit (ITC) Calculation.
Form T1263 – Third-Party Payments for SR&ED (if applicable).
When you file your corporate tax return (T2), these forms must be included.
Submission Deadline
You must file your SR&ED tax claim within 18 months after your tax year-end.
You will miss credits if you file late, so it’s important to file on time.
Maximize Your SR&ED Tax Incentives
The SR&ED program offers an excellent opportunity for businesses conducting R&D in Canada. By understanding how to calculate your expenditures, select the right method, and ensure your forms are accurate, you can significantly reduce your tax liability or receive refundable credits.
Next Steps for Your Business
Review Your R&D Activities – Ensure your projects meet SR&ED eligibility criteria.
Track Your Expenses – Maintain clear salaries, materials, and contracts records.
Choose a Calculation Method – Traditional vs. Proxy—determine which works best. You can also use Panna's free SR&ED Calculator.
File on Time – Submit your claim within the 18-month deadline.
Seek Expert Help – Work with a funding specialist to maximize your claim.
What's Next?
At Panna, we help Canadian businesses uncover additional non-dilutive funding opportunities to fuel growth and innovation.
Don’t leave money on the table. Find out how much your business could claim and explore new funding options today.
SR&ED Tax Credit: Frequently Asked Questions
1. What is the SR&ED program?
The Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive designed to encourage businesses of all sizes to conduct R&D in Canada. It provides tax deductions and investment tax credits (ITCs) to offset eligible R&D expenses.
2. Who is eligible for SR&ED credits in 2024?
Eligible entities include:
Canadian-controlled private corporations (CCPCs)
Other corporations
Individuals
Partnerships
Trusts
To qualify, the work must involve systematic investigation or experimentation to achieve technological advancement or resolve scientific uncertainty.
3. What types of work qualify for SR&ED credits?
Eligible work includes:
Experimental development – Creating or improving materials, devices, products, or processes.
Applied research – Conducting research to solve specific problems.
Basic research – Advancing scientific knowledge without an immediate application.
Non-eligible activities include routine engineering, quality control, market research, and aesthetic design changes.
4. What expenses are eligible for SR&ED credits?
Eligible expenditures include:
Salaries and wages for employees directly engaged in SR&ED.
Materials consumed or transformed during R&D.
Contract payments for SR&ED work performed in Canada.
Overhead expenses (if using the traditional method).
Capital expenditures and patent-related costs generally do not qualify.
5. How much is the SR&ED tax credit in 2024?
The credit rate depends on your business structure:
CCPCs: Up to 35% refundable ITC on the first $3 million of eligible expenditures. The rate is reduced if taxable income exceeds $500,000.
Other corporations: 15% non-refundable ITC on eligible expenditures.
Provincial credits may also apply, varying by province.
6. Can I claim SR&ED credits for work done outside Canada?
No, SR&ED credits only apply to work conducted in Canada. However, some indirect costs related to foreign R&D may qualify if they support Canada-based SR&ED activities.
7. How do I apply for SR&ED credits?
To apply, you must:
Identify and document eligible SR&ED activities and expenses.
Complete Form T661 (SR&ED Expenditures Claim) and attach it to your corporate tax return (T2).
Submit supporting documentation, such as technical reports and financial records.
8. What documentation is required for an SR&ED claim?
To support your claim, you should maintain:
Technical reports detailing challenges, hypotheses, and experimental results.
Financial records (payroll, invoices, contracts).
Project timelines and logs tracking R&D activities.
Evidence of systematic experimentation.
9. What is the deadline for filing an SR&ED claim?
SR&ED claims must be filed within 12 months after your corporate tax return deadline.
For example, a company with a December 31, 2023, year-end must file by December 31, 2024.
10. Can I amend a previous SR&ED claim?
Yes, you can amend a past claim by submitting a revised Form T661 and supporting documents. You must file the amendment within 12 months of the original filing deadline.
11. What happens if the CRA reviews my SR&ED claim?
The Canada Revenue Agency (CRA) may request additional documents to verify eligibility. If the CRA denies part or all of your claim, you may file an appeal or request a reconsideration.
12. Are there any changes to the SR&ED program in 2024?
As of now, there are no major changes announced. However, businesses should stay updated on federal and provincial budget announcements for potential updates.
13. Can I claim SR&ED credits for subcontractors?
Yes, you can claim credits for third-party contractors performing SR&ED work in Canada. However, only payments to arm’s-length subcontractors qualify for ITCs.
14. What is the difference between refundable and non-refundable SR&ED credits?
Refundable credits (CCPCs) – If the credit exceeds taxes owed, the excess is paid as a refund.
Non-refundable credits (Other corporations) – The credit reduces tax payable but does not result in a refund. Unused credits may be carried forward or backward.
15. Can I claim SR&ED credits for software development?
Yes, software development qualifies if it involves overcoming technological uncertainties or advancing technology. Routine updates, bug fixes, and UI enhancements do not qualify.
16. How long does it take to receive SR&ED refunds?
CCPCs: Refunds are typically issued within 120 days of filing.
Other corporations: Non-refundable credits are applied to reduce tax payable.
17. Can I claim SR&ED credits for failed projects?
Yes, failed projects qualify as long as they involved systematic investigation or experimentation to resolve a technological uncertainty.
18. Are there provincial SR&ED programs?
Yes, many provinces offer additional R&D tax credits, including:
Quebec: Enhanced R&D tax credits.
British Columbia: SR&ED tax credits.
Each province has different rates and eligibility requirements.
19. Can I claim SR&ED credits for capital expenditures?
No, capital expenditures (e.g., equipment purchases) do not qualify. However, you may claim capital cost allowance (CCA) for depreciation.
20. Where can I get help with my SR&ED claim?
For assistance, you can:
Consult an SR&ED tax specialist for expert guidance.
Use the CRA’s SR&ED resources and program guides.
Work with industry associations or innovation hubs for additional support.