SR&ED Software Development – Can the CRA Help Fund Your Project?

Get the CRA to Fund your Software Development

If you have a software project underway, you may be eligible for Scientific Research and Experimental Development (SR&ED) tax credits. The Canada Revenue Agency (CRA) says that SR&ED for software development can be eligible for tax credits if certain base criteria are met.
Your SR&ED eligibility is decided by determining whether your project “attempts technological advancement,” “overcomes technological uncertainties,” and achieves these through “systematic investigation by qualified individuals.”
Many technology companies, large and small, have successfully claimed tax benefits for expenditures in the development of internal software, and software prototypes developed for eventual commercial use. Your software development project may also fit the bill. You just need to make sure the overall purpose and the development process is clearly outlined in your application in order to qualify for a SR&ED tax credit.

How does your software development fit into the SRED requirements for IT

As mentioned, your eligibility for an SR&ED tax credit is determined by your software development project’s purpose or intention. There are three criteria that qualify work as SR&ED eligible.
The first is that your project must be attempting technological advancement. In other words, you need to be working toward overcoming the shortcomings of an existing process and the intended result must be one that is not already available in the standard practice of your field.
The CRA will want to see that you actively searched for an existing solution through internet research, patent searches, methods of your competitors, or conferring with experts in your field.
The next criterion is having the goal of overcoming technological uncertainties. Whether the uncertainty is in the process or in the outcome, your project needs to propose an issue you are trying to solve and state what obstacles may be presented in your methods.
If you can prove that you know more now than you did at the start regarding what worked in your development process, you have overcome technological uncertainty.
The last of the criteria is using systematic investigation by qualified individuals. The CRA will want you to prove how you overcame limitations, and how you advanced your process by using new methods involved in prototypes, trials, and peer analysis.

Highlight the technological benefits

When applying for the SR&ED tax credit, it is important to remember that eligibility is not determined by whether or not you met your business goals or whether you profited from the results of any SR&ED projects.
Since the goal of the SR&ED tax program is to promote innovation in technology, be sure to focus on the aspects of your project that show you had a technological objective and that you pushed technological development forward.
An example that the CRA uses is the creation of a new records management system. From an internal business perspective, the goal of this new process might be increased business productivity and business efficiency. However, this desired result does not qualify you for the SR&ED tax credit, because it does not advance records management system knowledge.
Instead, you will want to focus on the technological aspects of the project and list the goal as, for example, to increase data storage and speed when compared to your previous system. This goal would qualify as technological advancement and make the project eligible for an SR&ED tax credit.

Use the scientific method

As previously mentioned, the use of systematic investigation in your project is required in order to make an SR&ED claim. The CRA’s guidelines for the SR&ED program state that your technological advancements in your product or process must be the result of using the scientific method.
This means that you need to show the CRA that you had an initial problem or question. Then you need to show that you did some background research and proposed a hypothesis. Testing of your hypothesis must occur and data from the testing needs to be analyzed and reported.
Be sure you are documenting throughout the project with emails, calendar invites, test scripts, or other methods in order to report your development milestones to the CRA and make your SR&ED claim.