An Overview of SR&ED Eligible Expenses

If your company engages in Manufacturing, Engineering, Science, or Technology, then you may be able to claim a scientific research and experimental development (SR&ED) investment tax credit from the Canada Revenue Agency (CRA). The SR&ED tax incentives are meant to stimulate basic or applied research and experimental development work in Canada.

This article should give you an overview of the eligible expenditures. If you believe that you may be eligible for a SR&ED tax credit, then you will benefit from speaking to an SR&ED consultant about your specific situation. If you meet the requirements to file a claim, then you may look forward to reducing your tax payable at the end of your tax year, and even getting a cash refund!

What Type of Expenses can you include in an SR&ED claim?

When you are considering filing a claim for SR&ED eligible expenses, then it is first important to understand exactly what qualified expenditures incurred can be included in your claim.

There are three general types of spending that you can claim in the SR&ED programme:

You can include any salaries or wages that you pay your employees and owners while conducting the research.

You can also include the fees you pay Canadian subcontractors throughout the process.

Finally, the money you spend on any materials that you use for your research, whether you consume or transform them, can be included in an SR&ED claim.

An important consideration when filing a claim for SR&ED eligible expenses is that the amount you can claim depends on the above expenditures. In fact, the CRA tends to give a higher percentage refund to researchers who request money related to staff wages or salaries than to those who have subcontractors execute the research. This is why it always pays off to hire an internal employee rather than using a subcontractor, as you are much more likely to receive a larger tax credit this way.

Overall, for Canadian Controlled Private Corporations (CCPC), about 64% of the expenditures on salaries are covered. The tax credit for Canadian subcontractors, however, is only about 32%. For materials, the percentage of expenditures covered is about 42%. Non-CCPC companies and large CCPC companies can also file an SR&ED claim, though the money they will receive is generally much less than small CCPC companies will benefit from.

SR&ED Tax Credit on Overhead Costs

Another way to increase your SR&ED claim is to claim part of your overhead cost. When you fill out the T661 form, it is important to note that you can either choose to use the traditional or proxy method claim method. Once you have made your decision about which method you will use, you will not be able to change it until the next year.

The Traditional Method of filling out Form T661 requires that you record each overhead cost related to your research. If you decide to choose this method, then we highly recommend creating a well-organized, activity-based spreadsheet or another document that can track all of the costs that you spent on the SR&ED project. You will also want to use a time-tracking app so you and your team don’t forget to log your time. This is helpful in getting the largest possible tax credit in the long run.

If the arduous process of expense tracking for overhead doesn’t sound like your cup of tea, then thankfully, there is another option. You can also opt to use the Proxy Method for overhead calculation when filling out Form T661. This method automatically grosses up your Salary and Wage expenditures by a generous 55% to estimate your Overhead expenses related to SR&ED activities. Depending on their unique projects and particular situation, we have seen our clients successfully use both of these methods.

Type of Work eligible for SR&ED

Most of what is covered in SR&ED is usually referred to as “support work”. This is work that has been undertaken by or on behalf of the taxpayer. Whether this work is related to computer programming, operations research, testing, data gathering, engineering, design, planning, or another aspect, it can be included as Support costs when it is directly related to the needs of performing SR&ED.

Work on the following categories can not be claimed, and therefore, it is referred to as “excluded work”:

• Researching or studying fields related to humanities and/or social sciences
• Working to produce or exploit minerals or natural gases
• Frequently gathering the same data
• Collecting information as a part of your business’s sales promotion and market research
• Testing the quality of any product, service, or material good
• Controlling the quality of your production services

The key feature that distinguishes between support work and excluded work is its major purpose. Why was the work done? Was it done to support basic research, which is meant to improve overall scientific knowledge? Was this project an example of applied research, meaning that it had a particular practical application in mind? Or, was it an experimental development with the goal of adding to technological advancements?

Basic research, applied research, and experimental developments are all included in the SR&ED eligible expenses category, but other reasons for scientific research are not.

Get help when you want to apply for SRED eligible expenses

Answering the above questions should give you a good idea of whether or not the money you spent on your research project can be considered as SR&ED eligible expenses, and therefore, whether or not you can include this in a SR&ED claim.

If you want help with your SR&ED claim, then we encourage you to reach out to an SR&ED consultant at Conceptinero Inc. We are here to help with your unique situation and ensure that you receive the highest tax credit amount possible. Conceptinero Inc. appreciates the major impact that scientists and researchers have on our society, and we look forward to supporting you throughout the SR&ED eligible expenses claim process.