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- What is the SR&ED program and how does it work?
- Who can benefit from the SR&ED program?
- What work is eligible and what are the criteria?
- What are the benefits of SR&ED?
- What are the deadlines for filing SR&ED claims?
- Why should you outsource SR&ED preparation?
- What fields of science or technology are recognized for SR&ED?
- What is the Effect of the 2012 Federal Budget on the SR&ED Program?
- What is the Effect of the 2012 Federal Budget on General Technology Incentive Funding in Canada?
1. What Is the SR&ED Program and How Does It Work?
The acronym SR&ED is used to describe the Scientific Research and Experimental Development tax incentive program. The program is the largest single governmental incentive for promoting research, development, and the commercialization of technology in Canada. As of 2011, the Federal government distributed in excess of $4 billion in annual tax credits to Canadian companies.
The SR&ED program differs from most other government technology incentives since it is a tax entitlement program. A number of important consequences result from this:
- The program does not have a budget cap. Any tax-eligible entity that meets the requirements is entitled to receive the benefits
- The program provides after-the-fact tax benefits. Organizations do not receive funding up front: they must conduct their research and then submit the required forms with their tax filings for the year to receive benefits
- Multiple taxpayers are eligible to claim benefits for the development of the same technology. This is true as long as each company’s work meets the eligibility requirements of the program
- Information remains private: the confidentiality of SR&ED information is protected through the Canadian Income Tax Act
Although the SR&ED program was conceived and created by the Ministry of Finance, the federal program is administered by the Canada Revenue Agency (CRA). The success of the national program has led most provinces to offer a provincial SR&ED credit, most of which are coordinated by the CRA through administrative agreements. Refer to the What Work is Eligible?, Who Can Benefit from the SR&ED Program?, and What are the Benefits of SR&ED? for further information, or contact TSGI for a complimentary assessment.
2. Who Can Benefit From the SR&ED Program?
The SR&ED program supports research and development across a broad spectrum of scientific and technical fields. Because it is a tax incentive program, only potentially taxable, for-profit, entities can generate and/or receive the benefits. These include:
- Canadian or foreign controlled private corporations
- Publically traded corporations
- Trusts (can generate SR&ED credits but may not be able to use them)
- Sole proprietorships
- Partnerships
Joint Venture projects can generate SR&ED credits which can be utilized by the participant organizations.
The filing deadlines, benefit amounts, claim processing time, and the refundability of tax credits are all affected by an organization’s structure and other circumstances. For further information refer to What are the Benefits of SR&ED? or contact TSGI for a complimentary assessment.
3. What Work Is Eligible and What Are the Criteria?
Basic eligibility
To qualify for the SR&ED program, work must be a systematic search or investigation in a field of science or technology and fall into one of the following categories (from Income Tax Act 248(1):
- a. Basic research: work that advances scientific knowledge without a specific practical application in mind.
- b. Applied research: work that advances scientific knowledge with a specific practical application in mind.
- c. Experimental Development: work for the purpose of achieving a technological advancement for the purpose of creating new (or improved) materials, devices, products or processes.
- d. Support Work: engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research work directly in support (and commensurate with the needs) of a, b or c work.
The following are not eligible categories of SR&ED work:
- e. Market research or sales promotion
- f. Quality control or routine testing
- g. Research in the social sciences or humanities (including business processes)
- h. Prospecting, exploring or drilling for (or producing) minerals, petroleum or natural gas
- i. Commercial production or the commercial use of a new or improved material, device, product or process
- j. Style changes
- k. Routine data collection
The majority of SR&ED work falls in the category of experimental development and the majority of the costs are associated with the support work.
SR&ED eligibility is determined by applying three tests. Projects are only eligible if they meet each of the tests.
1) Scientific/Technological Advancement: the work must attempt to advance our understanding of science or technology. Alternately, if you are creating a new or improving a material, device, product, or process, it must embody an improvement in a scientific or technical understanding. This means it must attempt to achieve previously unattainable technical performance.
2) Scientific/Technological Obstacle/ Uncertainty: whether the advancement sought can be achieved (or the method by which it can be achieved) is not apparent on the basis of the scientific or technical knowledge then available to your company (internal knowledge plus generally available information).
3) Scientific/Technological Content: the work must be conducted in systematic manner by individuals with appropriate technical qualifications or experience.
Note: It is not necessary for a project to succeed technically, or in the business sense, in order to be eligible for SR&ED benefits. Failed projects may still be SR&ED eligible.
4. What Are the Benefits of SR&ED?
Projects that meet the eligibility criteria of the program may claim the following costs for SR&ED purposes:
- Materials
- Labour
- Capital expenditures
- Overhead and other expenditures
- Equipment leases
- Contract amounts and third-party payments (e.g to a university)
Companies receive two types of benefits on these costs:
- Pooling of Deductable SR&ED Expenditures: SR&ED expenditures can be pooled and used as business deductions in the current or any future year. For example, large capital items can be deducted from income immediately rather than following the usual multi-year amortization schedule. Because SR&ED pooled deductions can be carried forward indefinitely, organizations can strategize their tax liabilities over the long term.
- Investment Tax Credits (ITCs): By far the most significant benefit of the SR&ED program is that certain costs (qualified expenditures) generate investment tax credits (ITC’s) that can be used to lower an organization’s tax bill.
There are two types of ITCs. Refundable ITCs may be paid in cash to your organization even if you do not owe any taxes. Non-refundable ITCs can only act as pre-paid tax. Federal non-refundable ITCs can be applied to fiscal year ends 3 years before or 20 years after the year they are generated.
The tables below indicate the net SR&ED benefits for British Columbia, Alberta and Saskatchewan for the 2011 year. Why are they so complicated? The fact is the legislation and administrative rules governing the SR&ED program are complex. In the following, we’ve tried to give a simple and accurate portrayal of the program as it applies to these provinces. Please feel free to call us if you would like an assessment of your situation.
Alberta SR&ED Benefits for 2011
British Columbia SR&ED Benefits for 2011
Saskatchewan SR&ED Benefits for 2011
4a. Net SR&ED Benefits in Alberta for Fiscal Years Ending in 2011
| Organization Type | Amount of SR&ED Expenditures | Federal ITC Rate(1) | Alberta ITC Rate (2) | General Net SR&ED Benefit(2) | Potential SR&ED Benefit on Labour Costs(3) |
|---|---|---|---|---|---|
| CCPC(4) | Up to Federal expenditure limit(5) | 35% | 10% | 41.5%(6) | 68.5%(6) |
| CCPC(4) | Over Federal expenditure limit(5) | 20% | 10% | 28%(6) | 46.2%(6) |
| All Other Corporations | - | 20% | 10% | 28%(6) | 46.2%(6) |
| Partnerships(7), Trusts, Proprietorships | - | 20% | 0% | 20% | 33% |
Notes on Alberta Benefits:
(1) The federal ITC (Investment Tax Credit) may be all, partially or not refundable depending on the type of expenditure (current vs. capital), structure of your organization, and whether your annual spend exceeds your expenditure limit.
(2) The Alberta benefit is available and refundable on the first $4 million of eligible expenditures. For expenditures exceeding $4 million simply use the Federal ITC rate.
(3) On first $4 million of eligible expenditures, assuming proxy overhead method is selected and the relevant criteria are met. The proxy method is one of two allowable models for claiming overhead costs.
(4) CCPC is the acronym for a Canadian Controlled Private Corporation
(5) The Federal expenditure limit is $3 million unless the corporation’s taxable income for the previous year exceeded $500,000 (starting in 2011) or its taxable capital exceeds $10 million. Note that these thresholds are applied to associated groups of corporations as a whole and are lower for fiscal years before 2011.
(6) These values show the combined SR&ED benefits for the first year only. The current Alberta legislation creates an unusual double-offset (called a “double-grind”) with the Federal SR&ED program. As a result, the net SR&ED benefit to an organization is eroded over a multi-year period from 41.5% to 39.4% for row one above and from 28% to 26.5% in the other instances. The net SR&ED benefits on labor expenditures are similarly degraded over time to from 68.5% to 65% and from 46.2% to 43.7% in their respective categories.
UPDATE: The most recent proposed Alberta budget, made public February 9, 2012, recommends changes to the Provincial SR&ED system that will eliminate the double-grind issue. If the budget is accepted as proposed, SR&ED claimants will receive ITCs at the 41.5% level for CCPCs and 28% level for non-CCPCs. The change would be effective for tax years ending after March 31, 2012.
(7) Meaning corporations that are members of partnerships
4b. Net SR&ED Benefits in British Columbia for Fiscal Years Ending in 2011
| Organization Type | Amount of SR&ED Expenditures | Federal ITC Rate(1) | BC ITC Rate(2) | General Net SR&ED Benefit | Potential SR&ED Benefit on Labour Costs(3) |
|---|---|---|---|---|---|
| CCPC(4) | Up to Federal expenditure limit(5) | 35% | 10% | 41.50% | 68.50% |
| CCPC(4) | Over Federal expenditure limit(5) | 20% | 10% | 28% | 46.20% |
| All Other Corporations, Partnerships(6) | - | 20% | 10% | 28% | 46.20% |
| Trusts, Proprietorships (Individuals) | - | 20% | 0% | 20% | 33% |
Notes on British Columbia Benefits:
(1) The federal ITC (Investment Tax Credit) may be all, partially or not refundable depending on the type of expenditure (current vs. capital), structure of your organization, and whether your annual spend exceeds your expenditure limit.
(2) The BC benefit is refundable on the first $3 million in qualified expenditures and non-refundable thereafter
(3) Assuming proxy overhead method is selected and all relevant criteria are met. The proxy method is one of two allowable models for claiming overhead costs.
(4) CCPC is the acronym for a Canadian Controlled Private Corporation
(5) The Federal expenditure limit is $3 million unless the corporation’s taxable income for the previous year exceeded $500,000 (starting in 2011) or its taxable capital exceeds $10 million. Note that these thresholds are applied to associated groups of corporations as a whole and are lower for fiscal years before 2011.
(6) Meaning corporations that are members of partnerships (other than specified members)
4c. Net SR&ED Benefits in Saskatchewan for Fiscal Years Ending in 2011
| Organization Type | Amount of SR&ED Expenditures | Federal ITC Rate(1) | Sask ITC Rate (2) | General Net SR&ED Benefit | Potential SR&ED Benefit on Labour Costs(3) |
|---|---|---|---|---|---|
| CCPC(4) | Up to Federal expenditure limit(5) | 35% | 15% | 44.70% | 73.80% |
| CCPC(4) | Over Federal expenditure limit(5) | 20% | 15% | 32% | 52.80% |
| All Other Corporations, partnerships (6), Trusts | - | 20% | 15% | 32% | 52.80% |
| Partnerships (individuals) | - | 20% | 0% | 20% | 33% |
Notes on Saskatchewan Benefits:
(1) The federal ITC (Investment Tax Credit) may be all, partially or not refundable depending on the type of expenditure (current vs. capital), structure of your organization, and whether your annual spend exceeds of your expenditure limit.
(2) The Saskatchewan benefit is 15% refundable on eligible expenditures after March 18, 2009
(3) Assuming proxy overhead method is selected and all relevant criteria are met. The proxy method is one of two allowable models for claiming overhead costs.
(4) CCPC is the acronym for a Canadian Controlled Private Corporation
(5) The Federal expenditure limit is $3 million unless the corporation’s taxable income for the previous year exceeded $500,000 (starting in 2011) or its taxable capital exceeds $10 million. Note that these thresholds are applied to associations of corporations and are lower for fiscal years before 2011.
(6) Meaning corporations that are members of partnerships
For additional information regarding provincial SR&ED benefits please call TSGI or refer to the CRA: www.cra-arc.gc.ca/txcrdt/sred-rsde/prv-crdts-eng.html.
5. What Are the Filing Deadlines for SR&ED?
The deadline for filing a Federal SR&ED claim is defined as 12 months after the normal filing deadline for the claimant’s taxes. The tax filing deadline varies with the type of claimant as follows:
| Claimant Type | General Tax Filing Deadline | SR&ED Filing Deadline (Tax Deadline + 12 months) |
|---|---|---|
| Corporations | 6 months after the fiscal year end | 18 months after the fiscal year end |
| Proprietorships (Individuals) | Usually by June 15 of following year | Usually 17 ½ months after the fiscal year end |
| Partnerships | Determined by the filing deadline of the partner | Refer to the type of partner (individual or corporation) |
| Trusts | 90 days after fiscal year end | 90 days + 12 months |
6. Why Should You Outsource SR&ED Preparation?
Many companies choose to outsource the preparations of their SR&ED claims in order to:
- Get their technology to market faster by relieving their tech and financial teams of the SR&ED workload
- Improve morale: technology developers frequently hate SR&ED paperwork
- Save time and reduce errors through TSGI’s time-tested systems
- Gain peace of mind knowing that the SR&ED is being handled by top professionals
- Ensure receipt of full SR&ED benefits
- Minimize the risk of a CRA audit
- Benefit from TSGI’s strategic advice
- Borrow against SR&ED claims. Most SR&ED financers insist on 3rd party claim management; they know the value of professional SR&ED advice.
It makes sense to engage outside SR&ED advice if you meet one or more of the following higher-risk criteria:
- Your R&D spent exceeds about $150K/year (entrepreneurs: add in fair market compensation for yourself)
- Multiple associated or related legal entities are involved
- Cases of partnerships, trusts or joint ventures executing SR&ED
- Suppliers or customers participate in the development through non-trivial contractual arrangements
- You are an oil and gas producer or service company
- Your project spans multiple years and/or multiple provincial jurisdictions
- Foreign-based entities are involved (either part of or outside of your organization)
- There could be dispute about who should get the SR&ED claim
- The technology developers are owners in the company
- Your claim is primarily software-based
Many of Canada’s most innovative organizations selected TSGI as their SR&ED provider after comparing our solution to other approaches. You can read their stories at Why Choose TSGI and What Our Clients Say About Us.
7. What Fields of Science or Technology are Recognized for SR&ED?
CRA recognizes many fields of science and technology for SR&ED Purposes. The complete list is available to view here.
8. What is the Effect of the 2012 Federal Budget on the SR&ED Program?
The implications of the 2012 Federal Budget on the SR&ED program can be viewed here.
9. What is the Effect of the 2012 Federal Budget on General Technology Incentive Funding in Canada?
The implications of the 2012 Federal Budget on general technology incentive funding in Canada can be viewed here.