The Scientific Research and Experimental Development (SR&ED) program is a Canadian federal government program aimed at encouraging corporations, SMEs, startups, partnerships and individuals to invest in experimental development and scientific research.
You can make SR&ED claim up to 35% of your spend on qualified scientific and experimental development costs in the form of cash or an investment tax credit. You can get 35% back in cash, up to a maximum of C$3 million of SR&ED expenditure. Anything above this C$3 million threshold can be claimed at a 15% rate which is non-refundable and used to offset against future tax.
SR&ED is a strict program - the CRA is likely to look carefully at your SR&ED claim and has a relatively high audit rate. We want you to get your money back in a smooth process. The best way to do that is to make sure you fully understand the SR&ED program’s requirements before you start. This SR&ED claim guide will walk through the steps. Please reach out if we can give you free SR&ED advice in a no charge SR&ED consultation.
We’ll talk mostly about startups and companies in this guide because most of our clients at F6S are CCPCs and corporations use our SR&ED services.
The official definition of SR&ED is a systematic investigation or search which is to be carried out in the field of either science or technology. You can see more in the Canadian Income Tax Act, subsection 248(1). We'll answer what that means right now.
Your startup or company is carrying out SR&ED eligible research and development if you are:
Please don’t rule out a SR&ED claim if you’re not curing cancer or probing at the fabric of our universe! We can and do constantly get SR&ED claims for startups in software, AI/ML, blockchain, social, media, fintech and many other areas of tech.
Once our team of SR&ED experts have confirmed your eligibility, we dig into the areas you get money back from the Canadian government. F6S' experts in SR&ED services are available to give you a free SR&ED consultation to identify the spending areas where you can get money back, including:
What areas are tough for our SR&ED services to match with SR&ED eligibility? You should still consult with us to be sure as the list below is not exhaustive, but according to the Canada Revenue Agency you can’t make a successful SR&ED claim in:
Can you answer 'Yes' to each of the item below?
Take a look at the five things below the Canada Revenue Authority considers to get an idea whether you have a SR&ED claim they'll approve.
Some might seem obvious, but a successful SR&ED claim rests on ticking all five boxes with full supporting evidence.
We’re here to give you free advice for any questions about your SR&ED eligibility.
A ‘Yes’ to all five questions, completing the work required to support the answer and justifying your claim's eligibility can deliver a cash refund (if you’re losing money) or a deduction of SR&ED expenditures from your tax bill (if you’re profitable).
There’s a lot more work to do though.
The next step is to explain your activity to the CRA in detail, find all the costs that are eligible (and avoid ineligible costs), complete the financial calculation and submit to the CRA. If audited by the CRA, you need to be prepared to defend your claim.
Once you’ve submitted your SR&ED tax claim to the CRA, it takes an average of eight weeks to review your filing and determine your SR&ED eligibility. It can take twenty-four weeks or more for claims the CRA wants to look at in more detail.
Many of F6S’ startup founder clients count on SR&ED services and funds as a key source of cash to run their startup or company. We strongly recommend you are 100% certain you’re eligible and have prepared your claim correctly before it goes to the CRA to avoid delays or questions.
We’re happy to advise on your SR&ED eligibility and any other questions you might have without charge.
Your startup or company’s claim can be passed to the Coordinating Tax Services Office (CTSO) if it’s flagged for review. The CTSO can also send your claim to financial and technical advisors for evaluation. The CRA and CTSO take these reviews seriously so it’s important to make sure that your claim describes your activity correctly and makes a water-tight argument for your SR&ED eligibility.
It can be hard to re-establish credibility if your initial claim doesn’t present what you’re doing correctly.
It’s common for incomplete or poorly prepared claims to be sent back to you with requests for more information or with questions for you to answer.
F6S SR&ED services takes care of these queries as part of our service to F6S SR&ED services clients.
The Investment Tax Credit (ITC) rates and the percentage that can be refunded or credited rely heavily on how your business is set up. The ITCs and refundable rates that apply to qualified SR&ED expenditures are dependent on the following factors:
The table below shows how much you can get back from SR&ED depending on where your corporation is based, how much eligible SR&ED spend you have and the type of company you have.
The Cash Repayment Rate is the percentage that is refunded of your total SR&ED tax credit. As a rough example, if you have $100 in eligible SR&ED spending as a CCPC, you can claim $35 as a SR&ED tax credit and $35 (100%) is refundable up to the first $3m of SRED expenditures. For the first $100 over $3m, you can claim $15 as a SR&ED tax credit and £6 (40%) is refundable.
*Note: The above SR&ED Tax Credit rates are based on the year 2020
The Canada Revenue Agency (CRA) offers a variety of resources and services to businesses that want to claim SR&ED Tax Credits under the Scientific Research and Experimental Development (SR&ED) tax incentive programme. These include:
The idea is to give you assurance that your claim will be accepted as filed when it is received by the CRA. Before submitting your claim, you can use this service to determine whether your company's research and development work and qualifying expenditures are eligible for the SR&ED tax incentives. It is a free service that can be used by any business that wants to claim SRED credits.
You must meet the following requirements to qualify for a Pre-Claim Review:
Before you file a SR&ED claim, a pre-claim consultation will help you figure out if any of your projects contain work that qualifies for scientific research and experimental development (SR&ED). You must meet the basic conditions for claiming SR&ED tax incentives in order to request a pre-claim consultation.
The projects you want the Pre-Claim Consultation for must match these criteria:
The information you give for the consultation will be used by SR&ED reviewers to:
You must fill out and submit an online pre-claim consultation request form to seek a pre-claim consultation.
This is a free advisory service that allows first-time scientific research and experimental development (SR&ED) claimants to meet with local CRA SR&ED officials to learn more about the SR&ED Program.
CRA’s SR&ED officials will advise businesses on the following topics:
During the visit, CRA representatives will:
Following the visit, you will receive a report summarising what was discussed as well as recommendations for improving future claims, if any.
This is a new virtual service that connects businesses with the CRA’s SR&ED representatives. It is important to note that this is not a review or an audit.
This service will help SR&ED claimants:
The SR&ED administrative review is your opportunity to escalate any concerns you have about decisions the CRA took on your SR&ED tax credit claim, such as appealing any denied SR&ED tax credits requested under SR&ED. The administrative review process is part of the CRA’s commitment to treat all SR&ED program claimants fairly. The Administrative Review Form RC532 is aimed towards resolving the claimants' concerns related to SR&ED tax credits.
To request an Administrative Review (AR), the claimant must have received the proposal package from the CRA, which explains the outcomes of the SR&ED claim review. The claimant should notify the reviewers of their intent to request an AR before the 30-day proposal period expires.
The AR form can be filled by the claimants and submitted to the Assistant Director.
There can be two possible outcomes of the Administrative Review:
If the Administrative Review determines that the SR&ED technical or financial review was not in accordance with current SR&ED legislation and policy, further action will be taken to rectify the decision. The Assistant Director may decide that the administrative review will be conducted by someone who was not engaged in the original evaluation.
If the Administrative Review finds that the SR&ED technical or financial review was conducted in accordance with current SR&ED guide, legislation, application policies, and that the claimant was treated fairly, the review will not be reconsidered. The claimant will be notified of the outcome in writing by the Assistant Director.
The Self-Assessment and Learning Tool was created to help claimants learn about the Scientific Research and Experimental Development (SR&ED) Program's eligibility requirements.
SALT is intended to assist you in the following areas:
The amount of money your startup or company can get back from the Canadian government for technical spend varies based on what kind of organization you spend the money through.
The CRA provides a higher level of SR&ED refunds to Canadian-controlled Private Corporations (CCPCs), and a lower level to other private corporations, individuals (proprietorships) and trusts. Partnerships are specifically excluded from SR&ED eligibility.
Federal SR&ED can refund you up to 35% of a CPC’s qualifying spend. The refund to the CCPC is called an Investment Tax Credit (ITC).
We’re only looking at federal Canadian SR&ED tax refunds in this guide, but most Canadian provinces have their own SR&ED schemes. We can advise you on how to get the most cash back in a free SR&ED consultation once we know where you are in Canada.
All non-CCPC applications for SR&ED get ITC at 15% for qualifying SR&ED tax credit spend.
Even more important, in this case the ITC can only be used to reduce your tax bill. In other words, you can’t get money back if you’re not a CPCC and are losing money. This includes individuals, trusts and the other entity types we laid out in this guide.
As mentioned above, partnerships can’t claim SR&ED tax credits even if the activity would otherwise be eligible. This is because a partnership is not legally considered a taxpayer. The ITC for a partnership is given to the individual members (individuals, corporations, or trusts).
First, make sure that your startup or company is doing something that qualifies. The CRA defines what counts for them as research and development. Reach out to us for a free SR&ED consultation or check out the other sections of the guide.
Make sure you have all of your documentation together. Your claim will take a while for the CRA to process so it's important to ensure it’s correct when its submitted. F6S can help you understand what kind of documentation you’ll need with our SR&ED services.
Next, find all of the expenditures that have SR&ED eligibility so you can claim money back for SR&ED activity. At a basic level you may be able to get money back for SR&ED related costs incurred within Canada for:
Start preparing your claim when you have all of the above information on SR&ED eligibility for your expenses, you have prepared the list of expenses and it's correctly categorized and supported in the way the Canada Revenue Authority will expect.
You’re now need to prepare the basic parts of your SR&ED tax credits claim:
The SR&ED tax credits system requires you to submit the SR&ED Expenditures Claims form (form T661), which outlines your SR&ED expenditure and technical description of your research and development.
This is submitted along with the income tax return for your startup or company through form T2SCH3. If you’re an individual it’s through form T2038(IND).
You should be ready to submit (and may be asked to submit) additional support in addition to the T661, T2SCH3 and/or T2038(IND) forms. Some financial and technical documents you may be required to have at hand are:
The CRA generally takes five weeks to eight weeks to process and evaluate your SR&ED eligibility after submission, but processing times can be longer when they are under load.
It can take twenty-four weeks or more for claims the CRA wants to look at in more detail.
It’s common for incomplete or poorly prepared claims to be sent back to you with requests for more information or with questions for you to answer. As we’ve mentioned, the CRA may ask you for more information or send you questions for multiple reasons, including missing documentation or inadequate responses to justify your claim.
Your startup or company’s claim can also be passed to the Coordinating Tax Services Office (CTSO) if it’s flagged for review. The CTSO can also send your claim to financial and technical advisors for evaluation. The CRA and CTSO take these reviews seriously so it’s important to make sure that your claim describes your activity correctly and makes a water-tight argument for your SR&ED eligibility.
It can be hard to re-establish credibility if your initial claim doesn’t present what you’re doing correctly.
F6S SR&ED services takes care of these queries as part of our service to F6S SR&ED services clients, but the best thing is to avoid these issues entirely by making a strong submission in the first place.
There’s nothing more frustrating to us than finding a startup founder or company that has SR&ED eligible spend outside their claim period.
You lose the ability to get money back regardless of your SR&ED tax credit eligibility when you go outside of the Canada Tax Authority's time limits for claiming your SR&ED tax claim back. As a general rule:
The CRA will review your claim for compliance with the rules around SR&ED tax credits. It is also likely to conduct checks to make sure the costs you are claiming are legitimate.
If satisfied, the CRA will approve your claim and either issue a payment (if you’re loss making) or a credit against your taxes (if profitable).
The CRA can also decide that it wants to question the information you’ve provided, that your claim is incomplete, or that it just wants to spend more time reading your technical description and other aspects.
When this happens, your claim is forwarded to the CTSO. The CTSO’s technical and financial specialists will then go through your claim to run the numbers or investigate whether your research and development activities are inline with the SR&ED tax guidelines.
We mentioned that it’s important to be 100% sure you’ve described how your project(s) complies with the CRA’s definition of eligible activities. This is where that work pays off again.
The same is true for making sure you’ve claimed as much as you can, but no more. The financial reviewer will be determining if the expenses you’ve claimed are eligible as per the SR&ED tax guidelines.
You’ll get a Notice of Assessment at the end of any review with a decision. Your claim may be either invalidated or approved at that point.
If the claim is invalidated, you have 90 days from the date on the Notice of Assessment to file an objection and argue why you feel your SR&ED claim is valid.
We make sure that processing times for our SR&ED clients are as short as possible and that your claim moves smoothly by getting your initial submission right.
To sum up, make sure you answer the 5 Q’s of SR&ED tax credits correctly, claim all of your eligible SR&ED expenditures and provide correct support before you submit, rather than after your claim has been sent to the CRA. F6S SR&ED services is standing by to provide free advice.
We love helping our thousands of startup and company clients get tens of millions of dollars back for their tech spend with our SR&ED services.
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