The Scientific Research and Experimental Development (SR&ED) Program uses tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. These tax incentives come in three forms: an income tax deduction, an investment tax credit (ITC), and, in certain circumstances, a refund.
The SR&ED Program provides more than $3 billion in tax incentives to over 16,000 claimants annually, making it the single largest federal program that supports business R&D in Canada. The program is administered by the Canada Revenue Agency (CRA).
Corporations, individuals, trusts and members of a partnership can use these Government of Canada incentives.
How businesses can benefit from SR&ED tax incentives
There are two main benefits of the SR&ED tax incentives:
- You can pool your SR&ED expenditures and deduct them against your current-year income or keep them and deduct them in a future year
- You can earn the SR&ED investment tax credit (ITC) and use it to reduce your income tax payable – In some cases, the CRA can refund the remaining ITC
Whatever eligible SR&ED work you are doing, your ITC will be at least 15% and can be as much as 35% of your qualified SR&ED expenditures. If you have any unused ITCs, you can carry them back 3 years or forward 20 years and apply them against tax payable for other years.
What businesses can earn
Canadian-controlled private corporations: Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable ITC at the enhanced rate of 35% on qualified SR&ED expenditures of $3 million. You can also earn a non-refundable ITC at the basic rate of 15% on an amount over $3 million. However, if you are a CCPC that also meets the definition of a qualifying corporation, you also earn a refundable ITC at the basic rate of 15% on an amount over $3 million, and 40% of the ITC can be refunded.
Other corporations: You can earn a non-refundable ITC at the basic rate of 15% on qualified SR&ED expenditures. You can use the ITC to reduce tax payable.
Individuals and trusts: Individuals (proprietorships) and trusts can earn a refundable ITC at the basic rate of 15% on qualified SR&ED expenditures. You first must apply the ITC against tax payable before the CRA can refund 40% of the unclaimed balance of ITCs earned in the year.