SR&ED tax credit

What counts as SR&ED work

The work must be done in Canada and meet two tests. It must aim at advancing scientific knowledge or achieving a technological advancement, and it must be a systematic investigation or search carried out by experiment or analysis. The CRA describes this as defining a problem, advancing a hypothesis, testing it and drawing logical conclusions. The work does not have to succeed.

Eligible work includes basic research, applied research and experimental development, which can include incremental improvements to products or processes. Support work such as testing or computer programming can qualify when it directly supports that work. Market research, routine testing, style changes, commercial production, and training or hiring an expert to apply what they already know are excluded.

What a claim can give you

A claim can reduce income through a deduction and earn an investment tax credit. The basic credit rate is 15% of qualified expenditures. Most CCPCs can earn an enhanced 35% rate up to an expenditure limit, which is $6 million for tax years beginning after December 15, 2024 and can be reduced for larger corporations. Associated CCPCs share one limit using Schedule 49.

Once the credit has been applied against tax payable, the 35% credit on current expenditures within the limit is refundable in full for most CCPCs, while some, called excluded corporations, are limited to 40%. The credit on capital expenditures is 40% refundable. Other corporations generally earn a non-refundable 15%. Unused non-refundable credits can generally be carried back 3 years and forward 20 years.

An illustration

Suppose an Ontario CCPC has $200,000 of qualified current expenditures for eligible work, is within its expenditure limit and owes no income tax. At 35%, the credit would be $70,000, and the refundable portion on current expenditures could come back as a refund. This is illustrative only. Government assistance such as NRC IRAP reduces the credit, provincial credits can reduce the expenditures you claim, and the final figure depends on what the CRA accepts.

Claim mechanics and deadlines

Corporations describe the work and report expenditures on Form T661 and calculate the credit on Schedule 31, filed with the T2 return. The SR&ED reporting deadline is 12 months after the T2 is due, and the CRA does not accept changes after it passes. Your claim can only be processed once the T2 has been received. Keep records showing what work was done, who did it, when, and how costs were calculated, such as project notes, test results and timesheets.

Optional pre-claim approval lets the CRA assess proposed projects before work starts. You must still file a claim.

What to discuss with your accountant

Ask whether your projects plausibly meet the technological uncertainty test, who will write the technical description, and how staff time will be tracked from the start of the year. Raise any government or provincial funding early, and confirm your associated corporations and expenditure limit. The CRA recommends involving both technical and financial staff, because you remain responsible for the claim’s accuracy.