Every year, more than 200,000 claimants use SR&ED tax incentives to support their research and development across Canada, benefiting our economy and society. Suppose you consider applying for the Scientific Research and Experimental Development (SR&ED) Program. In that case, there is a lot to understand about who is eligible, what type of work is eligible and what’s required to qualify.
Individuals and corporations alike can apply for a SR&ED tax credit. There are no minimums required regarding income, the number of employees, or anything of that nature. It also isn’t restricted by sector. As long as you’re conducting R&D in Canada, you can apply for these tax incentives.
Let’s learn more about SR&ED eligibility:
Type of SR&ED Research
To qualify, the research must be conducted in Canada and must meet the definition of either basic research, applied research, or experimental development. All eligible work must be conducted to gain new knowledge to help achieve an objective or resolve a problem and be carried out in a field of science or technology using experiments and analysis.
Basic research is defined as work undertaken to advance scientific knowledge without a specific practical application in mind. It is often the sort of research you’d see done in a university, government laboratory, or non-profit institution. That said, several businesses in Canada do basic research relating to biotechnology, nanotechnology, advanced materials, and computer applications. An example could be studying a new virus to uncover its behaviour and characteristics.
Applied research is undertaken to advance scientific knowledge with an objective and practical application. Like basic SR&ED research, applied research is done in a laboratory setting and is often published in scientific journals. Using the virus analogy again, applied research would develop a vaccine for this same virus based on pre-identified characteristics.
Experimental development has a wide definition. It encapsulates work undertaken to achieve technological advancement and create new or improved materials, devices, products, or processes. This type of R&D can include analyses and experiments into incremental improvements. Experimental development is the most commonly claimed SR&ED category.
Pursuing scientific or technological knowledge must be reasonable, logical, and centred around the existing fact. The problems that qualify under the SR&ED criteria, especially experimental development, are insufficient knowledge.
This can occur when existing design methods don’t apply, requirements any longer conform to existing standards. Also, there are too many unknowns, parameters or conditions that are outside of the operating range. Plus, it could be the nature of a problem is evolving, the data is not available, or when there are other constraints.
Scientific Knowledge Criteria
The focal point of SR&ED eligibility is why work is being performed. Scientific knowledge is conceptual in design, i.e. theories, prediction models, and the like. It does not necessarily refer to facts, i.e. data and measurements.
There can be some uncertainty in the result of work. However, it’s the attempt to resolve a scientific or technological problem that is valued above whether advancement was achieved or not. Successor failure is not relevant in assessing SR&ED eligibility.
Experimental Development Criteria
As the definition is quite vast, more specifically, work undertaken concerning engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research can all apply to what is considered experimental development under the existing SR&ED criteria.
Some specific types of R&D do not fit under the criteria for SR&ED experimental development. They include work in market research, sales promotion, quality control, routine testing, research in social sciences or the humanities, any exploration or drilling of minerals, petroleum, or natural gas, commercial production of materials or products, commercial use of a new or improved process, style changes to an existing product, or routine data collection.
How the work is conducted must be by experiment or analysis. Known design methods, techniques, procedures, protocols, standards, and practices must be followed. The idea that begins the investigation must be based on known facts. Testing this hypothesis must be documented and in line with the expectations above. Logical conclusions based on the results or findings must also be carried out.
Many businesses may be performing work eligible for SR&ED on the same project as excluded work. It can be difficult for first-time claimants to distinguish between what’s eligible and what isn’t. The difference ultimately lies in why the work was done and if it was carried out within the scope of what’s considered scientific research or experimental development.
An SR&ED tax credit can cover expenditures like salary, wages, materials procured, contracts, overhead, and third-party payments for qualifying projects.