SR&ED Tax Credit Guide – How to Qualify & Maximize Your Claim

Every year, over 20,000 Canadian businesses tap into the SR&ED tax credit and secure a share of $4.2 billion in tax incentives. 

If your company is engaged in research and development, this program could be a game-changer to recover a significant portion of your expenditures and reinvest in innovation.

So why does it actually exist? 

The federal government created SR&ED to drive technological advancements, keep Canadian businesses competitive, and encourage breakthroughs in science and technology.

Whether you're a startup, an established company, or an R&D team pushing your boundaries, this guide will help by walking you through:

• Introduction to SR&ED and eligibility criteria 
• The claimable amount 
• A step-by-step guide to filing a claim, along with tips for a smooth process 
• Real-life success stories and much more

What Does SR&ED Stand For? 

SR&ED stands for Scientific Research and Experimental Development. It is a program by the federal government of Canada designed to encourage innovative projects. 

The goal? 

To support Canadian businesses in their pursuit of scientific research and experimental development activities that contribute to the advancement of knowledge and technology.

Since its introduction in 1985, SR&ED has become one of the most significant tax incentive programs for Canadian-controlled private corporations (CCPs) and other businesses across the country. 

The purpose of this program is simple yet powerful. It aims to reduce the financial burden of companies working towards experimental development by providing tax credits that are usually refundable. 

SR&ED Eligibility: Who Can Claim SR&ED?

The SR&ED tax incentive program is open to all Canadian businesses, including corporations, partnerships, and sole proprietors. The main eligibility factor is your engagement with activities that involve research, development, and testing. 

Common Industries That Qualify

Knowing who can claim SR&ED is just the beginning. The real question is: does your industry make the cut? 

Let's dive into the eligible sectors: 

• Software development: If you’re a tech company working on new algorithms, coding improvements, machine learning technologies, or data-driven solutions, you can qualify for the SR&ED program. 
• Engineering: Whether it’s optimizing welding techniques or developing stronger, more durable construction methods, engineering projects that tackle technical challenges and drive technological advancements can qualify for SR&ED tax credits. 
• Biotech and pharmaceuticals: The biotech industry has seen some of the largest claims under SR&ED, particularly in research and testing for new drugs, treatments, and diagnostic tools. 

How Much Can You Claim with SR&ED? (SR&ED Tax Credit Calculation)

After checking your eligibility, it’s time to explore federal and provincial tax credit rates that will be available to you under this claim: 

Federal Government Tax Credits 

CCPCs are eligible for a 35% refundable tax credit on the first $3 million of qualified expenditures annually. Expenditures beyond this limit qualify for a 15% non-refundable tax credit.

Similarly, other corporations and entities can get a 15% non-refundable tax credit on all eligible SR&ED expenditures.

Provincial and Territorial SR&ED Tax Credits

In addition to federal incentives, various provinces and territories provide their own SR&ED tax credits, which can further enhance your financial benefits: 

• Alberta: Innovation Employment Grant (IEG) – refundable tax credit providing:
  
  • 8% refundable credit on eligible R&D expenditures up to the corporation’s base level of spending.
  • 20% refundable credit for expenditures exceeding the base spending level, up to $4 million annually.
• British Columbia: 10% refundable, only for Canadian-controlled private corporations (CCPCs).
• Manitoba: 15%, with 7.5% being refundable for in-house R&D and fully refundable for contract R&D with qualifying institutes.
• New Brunswick: 15% fully refundable on eligible R&D expenditures.
• Newfoundland and Labrador: 15% fully refundable tax credit on eligible R&D expenditures.
• Nova Scotia: 15% fully refundable on eligible R&D expenditures.
• Ontario: Offers options like:
  
  • Ontario Innovation Tax Credit (OITC): 8% to 10% refundable on the first $3 million of qualified investments.
  • Ontario Research and Development Tax Credit (ORDTC): 3.5% to 4.5% non-refundable.
• Saskatchewan: 10% refundable for CCPCs on the first $1 million of qualifying costs and 10% non-refundable beyond this limit.
• Quebec: Offers options for:

• CCPCs: Eligible for a 30% refundable credit on the first $3 million in eligible expenditures and a 14% refundable credit on expenditures exceeding $3 million.​
• Other corporations and individuals: Eligible for a 14% refundable credit on eligible expenditures.

• Saskatchewan: 10% refundable for CCPCs on the first $1 million of qualifying costs and 10% non-refundable beyond this limit.
• Yukon: 15% refundable, with an additional 5% for amounts paid to Yukon University.
• Northwest Territories, Nunavut, and Prince Edward Island: These regions do not offer specific SR&ED tax credits.

Calculation Methods

When preparing your SR&ED claim, it's important to choose the calculation method that best suits your business's needs. 

We have compared both types offered by the Canada Revenue Agency (CRA) to help you make an informed decision: 

In addition, the key to maximizing your SR&ED tax credits also includes thoroughly understanding which expenses qualify under the program. These include: 

• Wages: Salaries paid to employees directly engaged in SR&ED activities.
• Materials: Costs of materials consumed or transformed during SR&ED projects.
• Contracts: Payments to third parties for SR&ED work performed on behalf of your business.​
• Overhead: General business expenses that support SR&ED activities, such as utilities and rent.

How to Estimate Your Potential Refund

The following simple steps will help you calculate your potential refund easily: 

1. Determine qualified expenditures: For example, your total expenses sum up to $950,000. 
2. Calculate federal refund: If you are a Canadian-controlled corporation, then $950,000 × 35% = $332,500. 
3. Figure out provincial refund: Take British Columbia as an example: $950,000 × 10% = $95,000, 
4. Final calculation: Adding both federal and provincial amounts, the total refundable tax credit comes to $427,500. 

You can either receive the tax credits as a cash refund or use them to reduce the corporate income tax your business owes.

How to Prepare and Submit an SR&ED Claim

Now that you understand how much you can claim with SR&ED, let’s explore the steps to prepare and submit your claim efficiently: 

Step 1: Identify Eligible Research and Development (R&D) Activities

Begin by pinpointing which of your R&D tasks qualify for the SR&ED program. Eligible work typically includes:​

Experimental Development

This involves systematic efforts to achieve technological advancements to create new or improve existing materials, devices, products, or processes. 

For example, developing a more efficient manufacturing process to enhance production speed and reduce waste would qualify as experimental development. ​

Applied Research

Applied research is directed toward acquiring new knowledge with a specific practical application in view. 

For instance, conducting studies to develop a vaccine for a new virus exemplifies applied research, as it seeks to apply scientific knowledge to address a tangible health concern. ​

Basic Research

Basic research is undertaken to advance scientific knowledge without a specific practical application in mind. 

An example would be investigating the properties of a newly discovered material to understand its potential uses, even if immediate applications are not yet identified.

Step 2: Document All Supporting Evidence

Thorough documentation is crucial to support your claim and showcase the structured approach of your R&D efforts. Be sure to maintain the following documents:

• Payroll records: Documentation of salaries and wages paid to employees engaged in SR&ED activities.​ 
• Receipts and invoices: Proof of purchases related to materials, equipment, or services used in the R&D process.​
• Experimentation plans: Designs of experiments, test protocols, data, results, analyses, and conclusions.​

Step 3: Choose the Right SR&ED Claim Method

The next key step is to select the right claim method from these options: 

• Traditional method: Go with this if you track all SR&ED-related costs, including direct expenses and a share of overhead.
• Proxy method: Choose this if you’d rather keep it simple by using a set percentage of direct labor costs to cover overhead."

Step 4: Submit the Document with Forms

The last step is to finally file the document, along with: 

• Complete Form T661: This form is where you'll detail your SR&ED projects and associated expenditures
• Schedule T2SCH31: The schedule calculates the investment tax credits (ITCs) you claim for your expenditures.

Remember: Both Form T661 and Schedule T2SCH31 should be submitted alongside your T2 corporate income tax return.

Pro Tips For Smooth Claim Processing

While following the step-by-step guide gets you to submit the claim, consider these additional tips to make the process smoother:

1. Implement a system to maintain adequate documentation throughout your projects. This includes:
   
   1. Project planning documents
   2. Design blueprints
   3. Technical drawings
   4. Experiment records

Want to keep your documents updated as the project progresses? Chrono Platform can help by providing detailed reports on your R&D activities and project breakdowns in real time. 

Alt text: Financial summary with time tracking in different categories as seen in the Chrono Platform

2. Outline a comprehensive experimentation plan that includes your method of experimentation, hypotheses, testing procedures, and analyses to show the systematic nature of your research. ​
3. Track project hours accurately with timesheets and time categorization tools. Platforms like Chrono Platform make time-tracking even easier by automatically generating daily timesheets so you get accurate records without the hassle of manual entry.

4. Leverage CRA resources like the First-Time Claimant Advisory Service and Pre-Claim Consultation. These services offer guidance on eligibility requirements and the claim preparation process to enhance the accuracy and completeness of your submission.

What Happens After You Submit an SR&ED Claim?

After you submit your SR&ED claim, CRA conducts an initial assessment. This can lead to one of three outcomes:

• Acceptance as filed: If your claim is complete and meets all documentation requirements, it will be processed without further review. 
• Desk review: In some cases, the CRA may require additional information to verify your specific expenses or activities. A financial or technical reviewer will contact you to request these details.
• Detailed review (audit): For claims that are intricate or lack sufficient supporting evidence, the CRA initiates a comprehensive financial and technical assessment. 

Pro Tip: We advise you to use AI-powered tools such as Chrono Platform to stay compliant while submitting your documents. Such platforms automatically follow all the audit rules to reduce the risk of a detailed review.

With the Chrono Platform, you can easily track expenses by activity. Here’s how easy it is to add new activities from our dashboard:

What SR&ED Reviewers Look For 

When reviewing your application, CRA’s Research and Technology Advisors (RTAs) and Financial Reviewers (FRs) look for the following things: 

• Does the project attempt to resolve an issue that lacks an established solution? Or does the work contribute to new scientific knowledge or technological advancement?
• Is there a structured experimentation plan, including a method of experimentation and hypothesis testing?
• Are there detailed project records, including technical descriptions, design documents, and proof of payment for qualified expenditures?
• Are wages, material costs, third-party payments, and overhead expenses directly linked to eligible R&D activities?

How Long It Takes To Get Approved and Receive Funds

After meeting SR&ED review requirements, the next question is: how long until you receive your funds? It actually depends on the following factors: 

• Claims without a detailed review: Processed within 60 days.
• Refundable claims selected for a review: Can take up to 180 days, depending on complexity and responsiveness during the review process.

If your investment tax credits (ITCs) exceed taxes payable, you will receive a cash refund instantly after approval.

Common Mistakes That Cause Claim Rejection

To avoid issues in your review process, it’s important to know where tax credit claims typically go wrong:

• Weak project descriptions with no clear proof of your business’s involvement in scientific research or experimental development activities.
• Claiming costs unrelated to eligible R&D activities, such as sales promotion, social sciences research, or non-technical work.
• No structured plan, absence of a defined method of experimentation, or missing test results. 
• Incorrect tax credit claims, miscalculations of ITCs, or failure to include all qualified expenditures.

SR&ED Filing Deadline and Important Timelines

While the mistakes above may cause delays, missing the deadline can cost you the claim entirely. The SR&ED filing timeline includes these key dates that you need to keep in mind:

Federal SR&ED Claim Deadlines

The federal government allows Canadian businesses up to 18 months from the end of their fiscal year to submit an SR&ED claim. For instance: 

• If your company's fiscal year-end is December 31, 2023, the deadline to file an SR&ED tax claim would be June 30, 2025.
• For corporations with a fiscal year-end on March 31, 2024, the claim must be submitted by September 30, 2025.

This 18-month period is non-negotiable. In case the claim isn’t filed within this timeframe, you lose eligibility, regardless of how groundbreaking your scientific research or experimental development efforts may be.

Provincial Deadlines and Variations

In most cases, provincial and territorial programs align with the federal deadline, but some provinces have variations. For example, Newfoundland and Labrador require claims to be filed within 12 months after the corporate tax return filing deadline.

SR&ED Changes and Updates

The Canadian government has proposed several enhancements to the SR&ED program in its 2024 Fall Economic Statement, including: 

• Raise the expenditure limit for the 35% refundable tax credit from $3 million to $4.5 million. This would allow qualifying CCPCs to claim up to $1.575 million in refundable credits annually.
• Allow businesses to once again claim capital expenses under SR&ED, both as deductions against income and for ITCs. This applies to property bought and lease costs incurred on or after the 2024 Fall Economic Statement date and brings back the rules that were in place before 2014.
• Increase the taxable capital phase-out thresholds to $15 million and $75 million from $10 million and $50 million. This allows more companies to qualify for investment tax credits.
• Provide eligible Canadian public corporations with a 35% refundable tax credit on up to $4.5 million in SR&ED expenditures annually instead of the current 15% non-refundable credit.

To adapt to these changes, you should:

• Stay updated by regularly checking the CRA’s SR&ED announcements.
• Reassess eligibility based on the new taxable capital thresholds.
• Seek expert guidance from tax professionals to navigate the changes and maximize your refund.

Real-World SR&ED Examples

Now that you know everything you need to submit your SR&ED claim, take the next step with confidence. Many Canadian businesses have already leveraged these tax incentives to fuel innovation and secure their place in the market. And you can do as well!

A few of them, industry-wise, are: 

1. Software Development

Northforge Innovations Inc., a Quebec-based software development company, has been pushing the boundaries of cybersecurity and high-speed data transmission since 2004. Their work focuses on developing cutting-edge solutions that improve the secure and efficient transfer of video, voice, and data.

They took assistance from SR&ED to fuel their research and development activities. Over the years, the tax incentives from the program have been a game-changer that helped the company scale its team and take on complex network security challenges. 

2. Biotechnology

AmacaThera, a Toronto-based biotech firm, is revolutionizing post-surgery pain management with its innovative hydrogel platform, AmacaGel. 

To support their research and development efforts, the corporation engaged with the SR&ED program. According to AmacaThera’s CEO and Co-Founder Mike Cooke, this initiative was vital to the company's growth, especially during challenging periods such as the COVID-19 pandemic. 

3. Clean Tech

When it comes to sustainable energy, breakthroughs in battery technology are driving the future of electric mobility, and GBatteries is leading that charge. Founded in Ottawa in 2014, the company is developing lithium metal batteries using a proprietary intelligent battery management system to improve EV performance and accelerate adoption.

The financial backing by SR&ED gave GBatteries the momentum to refine its innovations, move toward commercialization, and solidify its place as a frontrunner in EV battery technology.

According to CEO Kostyantyn Khomutov:

Streamline Your SR&ED with the Chrono Platform

Looking to expedite your SR&ED filing process?

Chrono Platform can help. 

It can remove friction from the claim process and make it more efficient with features like: 

• Seamless data categorization
• Maintenance of accurate documentation
• Audit-ready claims
• Real-time accrual tracking 
• Automated creation of timesheets 
• Detailed reports on time usage and R&D activities

Whether you file independently, work with a consultant, or need expert guidance, the platform gives you the flexibility to claim SR&ED tax credits your way. 

Get started today with Chrono Platform to claim your SR&ED 10x faster. 

FAQs

What is the meaning of SR&ED?

The Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive supporting Canadian businesses engaged in R&D. It provides investment tax credits for developing new technologies, processes, or materials to drive scientific knowledge and technological advancement across industries.

Who can claim SR&ED in Canada?

Businesses of all sizes, including corporations, partnerships, and sole proprietors, can claim SR&ED tax credits if they engage in eligible R&D activities.

How far back can I claim SR&ED?

You can claim SR&ED tax credits up to 18 months after your fiscal year-end. Missing the deadline means losing tax incentives for that period.

What is the maximum SR&ED I can claim?

Canadian-Controlled Private Corporations (CCPCs) get a 35% refundable ITC on the first $3 million of qualified expenditures and 15% non-refundable beyond that. Meanwhile, non-CCPCs receive a 15% non-refundable ITC. Provincial tax credits may further increase the refundable amount.

How long does SR&ED approval take?

All the claims without review take about 60 days. If selected for a financial or technical review, processing for refundable claims may take up to 180 days, based on complexity and response time.

Is SR&ED refundable?

For Canadian-Controlled Private Corporations (CCPs), SR&ED tax credits can be refundable, meaning you get a cash refund if credits exceed taxes payable. Non-CCPCs get non-refundable credits, which offset corporate income tax but don’t result in payouts.