SR&ED is a massive tax program that funds science and technological innovation in Canada. Thousands of corporations, individuals, and partnerships apply and obtain funding through the Scientific Research and Experimental Development tax incentive program. How to qualify relies on doing everything right with your application and understanding what qualifies under the program.
The basic requirement to qualify for SR&ED funding is that the work must be:
- conducted for the advancement of scientific knowledge or to achieve technological advancement
- a systematic investigation carried out in a field of science or technology through either experiment or analysis
Here is how you can get SR&ED funding for your project.
Identify Eligible SR&ED Work
You may have a project where parts of it are claimable under the SRED program, and other components aren’t. Be ready to define what’s eligible and ineligible in your application. Eligible work includes basic research, applied research, experimental design, and support from engineering, design, operations research, mathematical analysis, computer programming, data collection, and testing.
A long list of work on SR&ED projects won’t receive funding. They include:
- any market research, sales promotion, quality control or routine testing, research in social sciences or the humanities
- prospecting or drilling for minerals, petroleum, or natural gas, commercial production of a material, device
- product for commercial use, style changes, and routine data collection.
Track Eligible SR&ED Work
Identify the duration of the project. Ensure that the knowledge gained is clear. Whether the project’s a success, failure, marketable, or commercial significance, this has no relevance to eligibility. Whether the project extends over multiple years or can be contained within the year, all eligible work has to be tracked and identified.
If there is insufficient documentation to support certain activities, they may be excluded from your SR&ED funding application.
What SR&ED Expenditures to Claim
Understanding how allowable SR&ED expenditures work is complex. This is where an SR&ED consultant can help maximize your claims and ensure the right supporting documentation is submitted. Salaries and wages, materials, contracts for SR&ED, overhead, and third-party payments are all eligible. A criterion for each of these must be followed if you claim them as a part of your SR&ED application.
Corporations must file Form T661 and Schedule T2SCH31. Individuals must file Form T661 and Form T2038. With these forms, SR&ED expenditures must be calculated accurately. All SR&ED ITCs should be calculated accurately. All technical and financial information that can be used to support your claim should be submitted as requested and held on to in case the CRA requests further support.
- Part 1: Fill in your BN, SIN, and other ID/contact information.
- Part 2: Detail the scientific or technological content of the work for each project you’re claiming.
- Part 3: Calculate allowable and deductible expenditures for your net income.
- Part 4: Calculate expenditures that qualify for your SR&ED ITC.
- Part 5: Calculate the proxy amount if you’ve selected the proxy method.
- Part 6: Break down costs being claimed on a per-project basis.
- Part 7: Fill in research and development data as requested by Statistics Canada.
- Part 8: Review the checklist to ensure your SR&ED claim is complete.
- Part 9 and 10: If applicable, this section is meant to detail information about your claim preparer, certifying that all information written into Form T661 is true, correct, and complete.
The strength of one’s SR&ED funding application is based on the technical and financial information used to support your claim. All documents generated by SR&ED work should be kept. You have other supporting evidence, such as photos, videos, and other artifacts.
Records like financial statements, ledgers, journals, receipts, contracts, and general correspondence are also valuable. The recommendation is to hang on to these documents for up to 6 years from the end of the last tax year they relate to.
SR&ED Application Deadline
Ensure your application and paperwork are filed on time. SR&ED reporting deadlines are strict. Any application filed after a reporting deadline has passed will not be accepted, even if the project would normally qualify under SR&ED guidelines.
To claim the SR&ED investment tax credit, ITC claims must be submitted no later than 12 months after your business, corporation, or trust income tax return is due.
The CRA may request additional information as you wait to hear if your SR&ED application is approved or denied. They might request a meeting or communication with you. Similarly, they may request a complete claim if the application was incomplete.
Also, they may want an associated income tax return that should have been included with the original application. You may be selected for a review or audit of a previous-year or current-year SR&ED claim. Be open and available for anything the CRA requests.