Scientific Research and Experimental Development Tax Credit Program

What is SR & ED?

SR&ED stands for Scientific Research and Experimental Development. The Canada Revenue Agency offers tax credit incentives and refunds for companies that perform any kind of qualifying Research and Development. In simple terms, these are companies that in the course of developing new or improving existing products, processes, or services, become involved in resolving issues encountered in the development. Essentially, if you have developed or created a new process, product, or improved an existing process or product, you may be eligible.

Who Qualifies

Businesses carrying on qualifying SR & ED activities in Canada qualify for the program. The type of business entity, ownership structure and size will affect the amount of the credit and how you receive it.

What tax benefits are available?

Businesses can qualify for refundable tax credits or tax credits that can be used against other income taxes owing.  For example a Canadian Controlled Private Corporation will qualify for a full refund of the tax credits earned on current expenditures and a 40% refund of tax credits earned on capital expenditures.  The balance of the credits not refunded can be used to reduce the income tax otherwise payable by the corporation.

What is a Qualifying SR&ED Project?

Canadian tax law states, “To establish whether or not the work you claim is eligible, we have to examine eligibility at the project level.”

“An SR&ED project consists of a set of interrelated activities that meet the three criteria of SR&ED defined in the current version of Information Circular 86-4, Scientific Research and Experimental Development.:

  1. the attempt to achieve specific scientific or technological advancement and
  2. overcome scientific or technological uncertainty, and
  3. must be pursued through a systematic investigation by means of experiment or analysis performed by qualified individuals.”

What Activities are Eligible for Scientific Research & Experimental Development Tax Credits?

 SR&ED is defined for income tax purposes:

“Scientific research and experimental development means systematic investigation or research that is carried out in a field of science or technology by means of experiment or analysis and that is

  1. a) basic research,

(b) applied research, or

(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,…”

Technological Advancement Definition:

“Achieving a technological advance would require removing the element of technological uncertainty through a process of systematic investigation … For an experimental development activity to be eligible the technological advance achieved has only to be slight.”

The search for a meaningful advance is satisfied whether or not the activity is successful. In other words, determining that a hypothesis is incorrect also represents a scientific or technological advance.”

 

An Example of What You Could Receive in Ontario for a corporation with income below $ 500,000

Income below $ 500,000 Income below $ 500,000
Non-CCPC Non-CCPC
CCPC Private CCPC Private
Eligible SR&ED Expenditures $100,000 $100,000 $100,000 $100,000
Assumed Proxy for salaries $65,000 $65,000
Total Expenditures $165,000 $165,000
Refundable Tax Credits
Ontario Innovation Tax Credit 10.00% 10.00% 16.50% 16.50%
Federal Tax Credit 30.08%   49.64%  
Total Refundable 40.08% 10.00% 66.14% 16.50%
Non-Refundable Tax Credits
Ontario Research and Development Tax Credit 4.05% 4.05% 6.68% 6.68%
Federal Tax Credit   17.19%   28.36%
Total Non-Refundable 4.05% 21.24% 6.68% 35.05%
       
Total Tax Credits % 44.13% 31.24% 72.82% 51.55%
Total Tax Credits $ $44,133 $31,240 $72,819 $51,546

 (Some conditions apply)

(The credits received are added to the corporations taxable income, reducing the overall benefit)

 

Where the proxy is available the expenditures are increased by up to 65% and therefore the resulting tax credits are increased by 65%.

ORDTC is at a rate of 4.5% of the expenditures less the 10% OITC claimed to bring the actual rate to 4.05%.  This credit is applicable against Ontario income tax only and is available to all corporations with a permanent establishment in Ontario.  Often corporation doing SR & ED will not have enough Ontario tax payable to fully utilize this credit. The credit can be carried forward for 20 years.

OITC is refundable (40% on capital expenditures) and is available to all corporations with a permanent establishment in Ontario.  The credit is phased out as the prior year’s income moves between $ 400,000 and $ 700,000.

The Federal credit is refundable to CCPC with income less than $ 500,000.  Where income moves between $ 500,000 and $ 800,000 the credit is converted from a 35% refundable credit to a 20% credit applied against tax.  The 35% refundable credit is available on up to $ 3,000,000 in current expenditures. The 35% credit is only refundable on capital expenditure at a rate of 40% of the 35% tax credit earned; the balance of the credit can be applied against federal income tax payable.

 

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