SR&ED Overview

The Scientific Research and Experimental Development (SR&ED) program, pronounced “shred”, is the largest source of federal and provincial government funding for industry R&D, providing over $3 billion to over 15,000 – 20,000 companies each year. About 75% of the claims are to small businesses. The government provides cash refunds or tax credits between 30% and 70% of the cost involved to develop new or improved products or processes. Wages to perform this work normally represent the majority of the claim, but other expenses such as materials and subcontractors can also qualify.

About SR&ED

Who Can Claim SR&ED?

Canadian-controlled private corporations (CCPC) can earn a cash payment on qualified SR&ED expenditures. It may seem strange, but you’ll receive a cash refund even if you are a CCPC that has never paid any income tax. Non-CCPCs can earn a non-refundable tax credit on qualified SR&ED expenditures, which can be applied to reduce tax payable, or carried forward or backward to reduce income tax in other fiscal years.

Value of a SR&ED claim

Eligible Expenditures Your SR&ED claim’s value is based on the eligible expenditures incurred in the SR&ED project. Those expenditures may include:

Salary or wages of employees directly engaged in SR&ED
Costs of consumed or transformed materials
Canadian sub-contractors for SR&ED performed on your behalf
Overhead and other expenditures associated with the SR&ED work
Payments to universities or research institutes

Overhead can be determined using either the traditional method or the proxy method. The traditional method involves claiming all of the incremental and directly attributable SR&ED overhead and other expenditures you incurred during the year. This can be difficult to track, and many expenses may not be considered incremental. The proxy method involves calculating a “proxy” amount for overhead and other expenditures, called the prescribed proxy amount. This is currently calculated as 55% of the total eligible labour expenditure. Most companies claim using the proxy amount, but the traditional method can be better if the labour expenditure is low or zero.

SR&ED Claim Benefit Summary
There are two benefits when filing a SR&ED claim:

1. The SR&ED expenditures are used to calculate your refundable or non-refundable investment tax credit (ITC), and
2. The SR&ED expenditures are accumulated in a pool, and you can decide when you want to deduct these expenses on your tax return. This can be useful for tax planning.

Federal SR&ED Rates
SR&ED Investment Tax Credits (ITC) are earned on qualified SR&ED expenditures incurred in a fiscal year. Canadian-controlled private corporations (CCPC) may earn ITCs at an enhanced rate of 35%, and these ITCs are refundable to the corporation. For non-CCPC claimants, ITCs are earned at a basic rate of 15% and the ITCs are tax credits that can be used to offset taxes owing. Subject to rules, ITCs at the end of the year may be carried back or carried forward. The federal ITC is in addition to Provincial ITC calculated on the same expenditures. However, the federal government scales back their ITC contribution based on the size of the Provincial ITC and if you receive assistance from other government agencies.

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Provincial SR&ED Rates
Each province and territory has its own ITC rules. All provinces except Quebec use the same expenditure pool as the federal SR&ED ITC calculation. These credits are administered by the CRA, through the unified filing process. Although Alberta and Quebec administer their own SR&ED ITCs, they still follow CRA’s lead for technical eligibility.

Summary of provincial and territorial rates:

Newfoundland and Labrador
- 15% of eligible expenditures, refundable
Nova Scotia<
- 15% of eligible expenditures, refundable
New Brunswick
- 15% of eligible expenditures, non-refundable
PEI
- No provincial assistance provided
Quebec
- 14-30% of eligible expenditures, non-refundable and refundable
- Quebec only considers labour and 50% of the eligible contractors as eligible expenditures
- Must meet minimum expenditure thresholds ($50K or $225K) before qualifying
Ontario
- 8% of eligible expenditures, fully refundable if they meet certain criteria (OITC)
- 3.5% of eligible expenditures, non-refundable (ORDTC)
Manitoba
- 7.5% of eligible expenditures refundable, and 7.5% non-refundable
Saskatchewan
- For CCPCs: 10% on first $1M of eligible expenditures are refundable, then 10% non-refundable over the $1M threshold
- For non-CCPCs: 10% of eligible expenditures non-refundable
Alberta
- 10% of eligible expenditures, refundable
British Columbia
- CCPCs: 10% of eligible expenditures, refundable
- Non-CCPCs: 10% of eligible expenditures, non-refundable
Yukon
- 15% of eligible expenditures, refundable
Nunavut and Northwest Territories
- No additional provincial assistance provided

Types of Qualifying Projects:

Overcoming the following types of problems can be evidence of SR&ED:

Cabinet Making & Wood Processing:

Bond failure between different materials

Experimenting with cheaper raw materials
Developing new construction techniques
Developing composite and engineered wood products
Dealing with material inconsistency that had to be overcome through uncommon processing adjustments
Saw mill, planing, routing, finishing, processing efficiency, and fiber recovery
Design for fit and assembly with thermal expansion and weatherability problems
Biodeterioration, wood protection and product durability
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation
Developing prototypes, or resolving issues in pre-production runs

Chemical Processing:

Particulate precipitation problems, liquid separation, and overcoming unexpected colour changes

Overcoming corrosion and premature equipment degradation
Cost reduction projects, using similar ingredients while retaining functionality
New formula development and functional experimentation
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation
Developing prototypes, or resolving issues in pre-production runs

Coating & Plating:

Experimenting with different masking techniques

Developing high-efficiency processing methods
Experimenting with more cost-effective chemicals
Designing new hangers for parts, to hang more parts on the line
Corrosion resistance, plasma deposition, high-efficiency processing methods
Barrier layer experiments and bond strength problems between coatings and substrate
Coating functionality and longevity versus thickness
New plating formulas and processes for lead time reductions or functional improvements
Resolving finish problems: mud cracking, orange peel, flaking, bubbles, pin holes
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation
Developing prototypes, or resolving issues in pre-production runs

Construction:

Developing new construction methods

Designing or modifying special equipment or tools
Developing new construction materials, or experiencing problems with new materials
Development of excavation and earth-moving systems
Formulation development of special concrete mixes (S.C.C., low shrinkage, crack resistant)
Development of mixes that reduce seepage in waste management or other sensitive sites
Product development to improve functional properties (e.g. filtration, fire resistance, exposure to heat)
Developing methods to remove raw ingredients which are new or unusual to the industry (e.g. smooth pea gravel, production of fines, working with contaminated pits, etc.)
Development of high-efficiency insulation and R values
Achieving sound attenuation through walls or development of sound barriers
Development of windows and door design for challenging applications
Development of systems to withstand high winds, earthquakes, etc.
Developing manufacturing processes for components used in the construction industry
Developing methods to reduce overall cycle time and construction time
Cost overruns because of unexpected technical problems
Resolving unexpected quality problems or warranty claims
Capital improvement projects that required development after installation

Dental Labs:

Implementation of new dental systems (pressable ceramic systems, CAD/CAM zirconia milling, 3D scan and mill, laser sintering systems, etc.) that didn’t go as planned

Experimenting with different ingot selection, or overcoming problems with unexpected margin chipping, fit, rocking and bridge twisting
Cost overruns because of unexpected cracks and remakes
Development of colour-matching methods and the associated remakes to learn how to achieve better colour match or shading
Overcoming problems with green state fractures during sintering and trimming, or with systems that are too technique sensitive
Making improvements to existing finishing, trimming, and wax up techniques
Determining custom settings for new equipment, tooling parameters, developing new bridge designs, or experimenting with new night guard materials, etc.
Development of trade secrets through experimentation
Experimenting with bio-compatibility of materials and strength of implant designs

Food & Beverage:

Organoleptic experiments

Large-volume versus small-volume experiments
Shelf life and stability studies
Experiments with freezing/drying or transportation
Environmental investigations in BOD reduction, waste recovery
New product packaging and/or process development
Product line extensions, including formulation alterations, manufacturing modifications, and ingredient substitution
Packaging and equipment design changes
Product development to address specific market needs (sugarless, gluten free, etc.)
Trying to increase shelf life of your product by experimenting with nitrogen freezing, other freezing, canning, dehydration, water content trials or by adding stabilizing ingredients
Doing R&D in aquaculture, or paying your supplier to do this development work
Performing tests to reduce your landfill impact, such as working with fertilizer producers, or developing uses for traditional wastes
Automating your production equipment (e.g. size grading, etc.)

Growers & Farmers:

Trait expression, controlled environmental experiments, experiments with different soil mediums

Fertilizer composition experiments or irrigation regimes
Experiments to grow non-native species in Canadian season cycles
Germination and young plant strength problems
Biocontrol and pesticide reduction experiments
New species development, disease resistance breeding
Animal feed experiments, enzymatic types and ratios to get better milk production, egg quality, weight increase, etc.
Environmental experiments and impact on animal health, heating, daylight exposure
Experimenting with new processing methods
Integrated livestock and crop experiments to optimize growth strategies
Capital improvement projects that required development after installation

Health Care:

Developing improved protocols or performing data analysis to achieve better or more cost-effective health outcomes

Determining the optimal formulations that have positive correlations to improved health indicators
Developing new drug efficacy
Stability investigations
Clinical trials
Process sterilization conversions (aseptic or terminal sterilization)
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Developing new products or processes, or making improvements to existing products and processes
Capital improvement projects that required development after installation

Metal Stamping, Tool & Die, Machining:

Developing the die by spotting the die, replacing or machining die sections in order to make the die correctly produce parts to drawing

Die tryouts and modifications to overcome material spring-back issues
Machining tight tolerances of 0.0002″ over large diameters or long lengths
Optimization of the process through experiments in feeds, speeds and cutting tools and tool coatings
Developing manufacturing procedures and welding techniques
Resolving issues related to being on containment
Rework, or engineering order changes to overcome warranty problems due to part failures
Reducing cycle time and part transfer problems between stations
Experiments to improve die, punch or cutting tool life
Unable to meet PPAP requirements for a new product on the first try
Resolving issues around an unexpected amount of scrap
Capital improvement projects that required trial and error to get things working after installation
Lost money on jobs, or ran into unexpected technical problems
Developing prototypes, or resolving issues in pre-production runs
Developing unique solutions regarding pouring pressures for intricate moulds (both vertical and horizontal)
Issues regarding waste management, handling, or valuable material reclamation/refining from slag and dross
Problems surrounding new alloy formulations (temperature profiles, mould form, material degradation, etc.)
Issues as a result of pushing the limits of shell moulding/mould insulation
Issues regarding emissions management as a result of new material formulations

Mining, Oil & Gas:

Environmental projects, such as greenhouse gas reduction, wildlife protection, reclamation projects, etc.

IT and software development related to communications, modeling simulations, process control systems, or remote equipment
Mining operations involving pilots, improved mining methods, wear reduction, drilling equipment, etc.
Processing that involved improving throughput, ore feed changes, or energy reduction
Exploration involving new detection methods, equipment or software development
Working with universities and research institutes
Technical projects that didn’t go as planned or the results were not as good as expected
Capital improvement projects that required development during or after installation

Plastic Moulding:

Resolving problems meeting cycle times

Mould DOE trials with different materials and process settings
Resolving mould function problems and cooling issues
Making modifications to core and cavity, to overcome unexpected technical issues
Improvements to functional structure, seal, and heat-resistant properties
Insulation or electrical development for hot runners
Overcoming problems with part warpage, blemishes, and shrinkage
Experimenting with different parison thickness or processing development
Overcoming problems with pneumatic control and pressure distribution
Overcoming problems with blow-out, tack position, trim and thickness variation
Resolving issues related to being on containment
Rework, or engineering order changes to overcome warranty problems due to part failures
Unable to meet PPAP requirements for a new product on the first try
Resolving issues around an unexpected amount of scrap
Capital improvement projects that required trial and error to get things working after installation
Lost money on jobs, or ran into unexpected technical problems
Developing prototypes, or resolving issues in pre-production runs

Power Generation, Electronics, Switchgear, Cables, Electrical:

Problems with integration of multiple functions into a micro-package

Issues with trying to extend battery life/power management
Signal strength and integrity, heat dissipation, and RF interference problems/experiments
High-voltage surge and wear resistance problems
Heat dissipation, magnetic interference, arc control issues
Investigations into alternate fuel sources (gas, electric, natural gas, propane, furnace oil conversions)
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation
Developing prototypes, or resolving issues in pre-production runs

Printing Industry:

Web-to-print development (problems with usability, and what you see is not what you get)

Technical issues converting from high-solvent printing inks to more environmentally friendly inks
Printing on new or unusual substrates requiring trial and error
Cost overruns because of unexpected technical problems
Print and ink drying problems, dye dispersion issues
Overcoming ink, chemical or other technical problems resulting from moving to high volume or high speed
Weatherability, scratch resistance or image fade property development
Continuous web printing, image shift and repeatability problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation
Developing prototypes, or resolving issues in pre-production runs

Software Development:

Development of light footprint software systems

Overcoming issues associated with limited resource hardware platforms (PC, cell phones, etc.)
Overcoming issues associated with performance (multi-user, high-volume, real-time)
Overcoming issues associated with security (data sharing, user privileges)
Overcoming issues associated with concurrency (hosted systems, performance)
Overcoming integration issues with hardware and software systems that were not initially designed to be integrated
Overcoming issues of integration between different generations of technologies (legacy / state-of-the art, mainframe / PC, different dBase generations, procedural / object-oriented, etc.)
Overcoming issues of data synchronization over distributed architectures
Overcoming issues of model / architecture abstraction for generalized solutions
Overcoming issues associated with data latency

The following are some examples of software development projects that have successfully been accepted for SR&ED:

Development of programming techniques that are unknown to other programmers
Architectures for latency minimization on small footprint open source database systems
Generalized online messaging technologies
Email client technologies
Web based platforms for the normalization and searching of data sets from non-standard sources
Real-time and large-volume data synchronization mechanisms
DataSet managers and synchronizers for combined geodata and non-geodata platforms
Lightweight thin client technologies for web delivery of GIS function
Dynamic routing platforms (IP-based networks)
Footprint and performance algorithmic optimizations for embedded devices
General cryptographic algorithm advancements for multiple platforms
Generic POS data collection platforms with trending algorithms
Database schema generators
Code generators
Abstracted data provider layers
Adaptive real-time search mechanisms for large-scale databases
Decision-making tools based on predictive and optimization models
Extendible state engines for the tracking of networked transactions in multi-media, multi-user environments
Polygonal character animation rendering platforms
Large-scale object replication mechanisms and client/server synchronization techniques
Platforms for the processing and wireless communication of information over resource-constrained platforms
Synchronization layers for portable systems communicating with central server-based repositories
Reduced command-set mechanisms for transaction and event processing
Online predictive transaction verification algorithms
Design of VoIP-based voice response units for high-performance IVR platforms
Data synchronization/update mechanisms for combinations of CD-ROM and web-based knowledge systems
Temporal analysis platforms
Email-based data tracking and referencing mechanisms across email and web-based platforms
Common core meta-portal technology to allow the creation and management of distributed websites and online documents via centralized portal architectures

System Integrators, Instruments, Automation & Controls:

Developing systems to fit into a smaller footprint

Trying to integrate new technology into a system, or to integrate hardware and software that is not normally integrated
System integration of multiple modules from different manufacturers
Development of unusual interface protocols
Development of safety systems and/or system integration
Communication and control problems with digital and analogue components.
System timing through PLC programming and iterative sequence development
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected warranty claims, service calls and re-work in the field
Developing prototypes, or resolving issues in pre-production runs

Textiles:

Development of fabrics, garments or structures with specific functionality components (e.g. medical garments, textile filters, temperature- or chemical-resistant fabrics and coatings, defined stretch/recovery, textile based architecture/structures)

Development of new or improved fabric or fibres (lighter, thickness, tensile strength, stretch or stretch stability)
Development of new dyes or dye process
Development of new inks or screening process
Printing on new or unusual substrates requiring trial and error
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation
Developing prototypes, or resolving issues in pre-production runs

Vehicle Outfitting, Performance Improvements & Modifications:

Developing better turning control, higher torque capability

Developing specialized vehicles, vehicle systems, or hauled units for fire, fluid hauling, ambulance, police, etc.
Cost overruns because of unexpected technical problems
Trial-and-error testing or experimenting to learn how to make products or to improve processes
Technical projects that didn’t go as planned or the results were not as good as expected
Lost money on a project (or didn’t make as much money as planned)
Developing new products or processes, or making improvements to existing products and processes
Unexpected quality problems or warranty claims
Capital improvement projects that required development after installation

Wineries/Oenology:

Oenology experiments, residual sugar and acidity control, enzyme experiments, cask wood experiments, rootstock and vine health experiments

Grape varietal selection, soil control, and temperature control experiments
Developing cultivars for various heat unit geographical locations
Product line extensions including formulation alterations, manufacturing modifications, and ingredient substitution
Packaging and equipment design changes
New product packages and/or process development