To meet SR&ED guidelines and qualify to work under the Scientific Research and Experimental Development program, one must understand the ‘why’ and ‘how’ behind a project. SR&ED eligibility is strict and defined, and there are standards for supporting documentation and limitations on what’s claimable. The earlier that claimants apply SR&ED guidelines to their work, the more likely their application will be successful in qualifying them for funding.
Any industry can apply for SRED. There is no limitation on who can apply for SR&ED tax credits. Over 20,000 claims are approved annually, with the most applicable industries being software development & ICT, manufacturing, biotechnology, oil & gas, energy, and agriculture. That said, if your project meets the SR&ED definition, the industry you are a part of has no relevance.
Let’s learn comprehensively about SRED guidelines.
A lot of projects qualify under SR&ED. Work undertaken in engineering, design, operations research, mathematical analysis, computer programming, and data collection all qualify.
A lot doesn’t qualify for SRED. Market research or sales promotion does not. The quality control or routine testing of materials, devices, products, processes, or routine data collection does not. Research in social sciences or the humanities doesn’t, either. If the project relates to the commercial production of new or improved material, device, product or process, it does not qualify. Also, the prospecting, exploring, or drilling for minerals, petroleum, or natural gas does not qualify for SR&ED.
Finally, SR&ED work must be performed in Canada. The entirety of your project must have been done in Canadian soil. Whether you are a Canadian-controlled private corporation (CCPC) or a foreign-owned corporation, you cannot claim SR&ED funding for work that was only partially done in Canada. Every province also has their SR&ED tax credit rate meaning that it may be beneficial for a national or international corporation to carefully look at where they wish to host its project.
SR&ED structure varies according to whether you’re a CCPC or non-CCPC. A CCPC is eligible for refundable investment tax credits (ITCs), while a non-CCPC is eligible for non-refundable ITCs. Percentages also vary, as evidenced in the chart below.
- Salaries: 64% for a CCPC and 36% for a non-CCPC
- Sub-contractors: 32% for a CCPC and 18% for a non-CCPC
- Materials: 42% for a CCPC and 24% for a non-CCPC
It is better to familiarize yourself with the full scope SR&ED guidelines before you begin on a project so that a concerted effort is being made to keep documentation. Documents are required to back up your claims. Documents should highlight the technological uncertainties and technical challenges as the work progresses. In your application, when called upon, they will also record what work was carried out and by whom.
Advance Scientific or Technical Knowledge Guidelines
The base standard for whether a project qualifies or not is ‘why’ and ‘how.’ Regarding the ‘why,’ work must be done to advance either scientific knowledge or technical advancement. The ‘how’ is to meet the definition of an SR&ED project. A systematic investigation or search must have been used.
Depending on the project type, a basic investigation or search should use known design methods, techniques, procedures, protocols, and standards. Here is a simple outline.
- Generate a hypothesis based on known facts.
- Test the hypothesis utilizing experiment or analysis.
- Arrive at a logical conclusion based on the findings of the experiment or analysis.
- Keep all evidence generated as the work progresses.
Project descriptions must be prepared to qualify for SR&ED funding. These descriptions explain the limitations of existing technology or knowledge and why they couldn’t be used to solve a problem. In this, one must also demonstrate how the systematic investigation was carried out, demonstrating the plan and intent of innovation. A primary reason why some claims are denied is that this project definition falls short.
Basic Research, Applied Research, or Experimental Development
The investigation or search must align with what’s appropriate for a given project. The definition of its research determines this. If it’s ‘basic research, it’s work undertaken for scientific advancement without a practical application. If it’s ‘applied research, it’s work undertaken for scientific advancement with a specific application in mind.
Most SR&ED projects fall under experimental development, i.e. work undertaken to achieve technological advancement to create or improve a material, device, product, or process.
A lot of people focus on whether their innovation was successful or not. They tend to gear their SR&ED applications towards the achievement of a new product, functionality, or process. However, it’s not the achievement that matters. It’s the intent and the method used to get there. A project may not have achieved its target. A project can fail and still qualify for SR&ED funding when/if the correct approach to the project is applied.