R&D Funding

A Guide to SR&ED
SR&ED (pronounced “shred”) stands for Scientific Research and Experimental Development. It is a federal tax incentive program used to encourage businesses to conduct research and development in Canada.[1] The program is administered by the Canadian Revenue Agency (the “CRA”). Research by the Canadian Advanced Technology Alliance shows that the CRA provides around $3 billion in tax credits every year.[2]
What are the tax benefits?
There are two main tax benefits of the SR&ED tax program.[3]

1. It allows you to deduct SR&ED expenditures from your income for tax purposes.
2. You can get a SR&ED investment tax credit (ITC). This allows you to lower your income tax payable under Part I of the Income Tax Act.

Who can claim SR&ED tax benefits?
Businesses, individuals, partnerships, and trusts operating in Canada can all gain tax benefits through the program.[4] However Canadian-controlled private corporations (“CCPC’s”) get enhanced benefits through the program.[5] Click HERE to see the requirements for what qualifies as a CCPC.
What kinds of research is covered
The Income Tax Act defines SR&ED in subsection 248(1). Broadly speaking, SR&ED means “systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis”.[6] This covers: basic research (scientific work without a specific practical application in view); applied research (scientific work with a specific practical application in view); and, experimental development (work aimed at achieving technological advancement for the purpose of creating improving or creating new products, devices, materials, etc.).
The definition also coves work done by, or on behalf of the tax payer, 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 supports the above three (basic research, applied research, or experimental development).[7]
What kinds of research is not covered
The government has made it clear what kinds of things they do not want to be covered with this tax incentive program. The following are not covered by the program:[8]

• Market research and sales promotion;
• Routine data collection;
• Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas;
• Quality control or routine testing of materials, devices, products or processes;
• Social sciences and humanities research;
• The commercial production of a new or improved material, device or product or the commercial use of a new or improved process; and
• Style changes (a change in the appearance or arrangement of an article that does not alter its efficiency, utility, efficiency, function, or operating.[9]

How to apply for SR&ED
To make a claim under the program, you have to file Form T661 along with your income tax return. Additionally, you must file either Form T2SCH31 if you are applying for a corporation, or form T2038(IND) if you are filing as an individual.[10]
Along with the forms, you must provide additional documents to support your SR&ED claim. Depending on what you were researching/developing, this can include things like experimentation plans, data records, prototypes, projecting planning documents, records of trial runs.[11]
The ability to apply for SR&ED will not last forever. Corporations have 18 months after the tax year for which the expenditures were incurred. Individuals have 17.5 months from this date.[12]      
What is on the horizon for SR&ED?
The SR&ED has seen its fair share of criticism. Some have said that program disproportionately helps big corporations and foreign subsidiaries.[13] Media reports of SR&ED abuse in 2012 spurred the government at the time to provide the CRA with more resources to curb this abuse.[14] In 2017, the Federal Budget stated SR&ED would be reviewed.[15] As of today, we have not heard from the government if this review has occurred.

Rick Josan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary

References:
[1]https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/claiming-tax-incentives.html
[2] https://obj.ca/article/liberals-tout-innovation-agenda-cra-keeps-scaling-back-sred-credits-cata
[3] Supra, note 1.
[4] Ibid
[5] Ibid
[6] Income Tax Act, section 248(1).
[7] Ibid.
[8] Ibid.
[9] https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html
[10] Supra Note 1.
[11] Ibid.
[12] Ibid.
[13] https://thelogic.co/news/the-big-read/shredding-tax-credits-why-canadas-biggest-rd-program-may-be-funding-the-wrong-innovation/
[14] https://www.itworldcanada.com/article/a-look-at-sred-in-2018-and-beyond/400423
[15] Ibid.