SR&ED is like an onion, there are various layers of what SR&ED means and similar to an onion, the deeper you go, the more you are going to cry. So we are going to start at the top layer, the actual definition.

SR&ED (pronounced as “shred”) is an acronym for the Scientific Research & Experimental Development tax credit program in Canada. This is a federal tax incentive program administered by the Canada Revenue Agency (“CRA”). It is not a small program, there are more than 20,000 claimants a year for about $4 billion dollars.

Small-medium sized enterprises that generate less than $500k of taxable net income and are controlled by Canadian residents receive an enhanced and refundable Investment Tax Credit. Refundable is the big part because they will actually send you a cheque provided you don’t owe them any taxes, which is great. For eligible work you can use the following for a rough estimate. Read the rest of the guide or the CRA’s SR&ED Guidance for a thorough definition.

• Eligible salaries are approximately 64% refundable tax credit.
• Eligible contractors are approximately 32% refundable tax credit.
• Eligible materials are approximately 42% refundable tax credit.

Now, just a warning, the following is the official definition (we even slimmed it down for length) so it is a bit of a mushy mouth full. Rest assured we have a summary below for simplicity.

SR&ED is defined for income tax purposes in subsection 248(1) of the ITA as follows:

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

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, 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,

and, in applying this definition in respect of a taxpayer, includes

(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,

but does not include work with respect to

(e) market research or sales promotion,

(f) quality control or routine testing of materials, devices, products or processes,

(g) research in the social sciences or the humanities,

(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

(j) style changes, or

(k) routine data collection;”

Ok, so let’s simplify this for discussion

There are two basic categories of SR&ED:

SR – Basic and applied research undertaken for the advancement of scientific knowledge.

ED – Experimental development undertaken for the purpose of achieving technological advancement for the purpose of creating new or improving existing materials, devices, products or processes. This includes qualified supporting work.

Now 90% of claims are under the ED category of SR&ED, so really it should be called the ED program but frankly it doesn’t sound nearly as cool. For the rest of the guide, we will talk just about ED and technological advancement but all the same determination, process and criteria apply to scientific research.

Not too bad right? It isn’t a program just specifically for companies doing advanced R&D in a think tank deep inside a mountain bunker. SR&ED can be claimed by any eligible company in any industry as long as it meets the criteria. Which begs the question, what is the criteria?