What Qualifies as SR&ED? A comprehensive Guide

Canada’s Scientific Research and Experimental Development (SR&ED) program is one of the most generous R&D tax incentive programs in the world. Administered by the Canada Revenue Agency (CRA), SR&ED provides tax credits and refunds to businesses of all sizes that conduct eligible R&D work in Canada. However, despite its financial benefits, the criteria for what qualifies as SR&ED can be misunderstood or overlooked.

This article breaks down what qualifies as SR&ED, helping innovators and business owners identify whether their work may be eligible.

What is SR&ED?

SR&ED stands for Scientific Research and Experimental Development, a federal tax incentive program that encourages businesses to conduct R&D in Canada. The program offers:

• Investment tax credits (ITCs) on eligible R&D expenditures

• Potential cash refunds for certain claimants (especially small Canadian-controlled private corporations, or CCPCs)

The goal is to stimulate technological advancement and innovation by reducing the financial risk involved in research and development.

1. Three Categories of SR&ED Work

To qualify, the work must fall into one or more of the following categories:

a. Basic Research

• Work undertaken to advance scientific knowledge without a specific practical application in view.

• Typically carried out by academic institutions or in partnership with them.

b. Applied Research

• Also aimed at advancing scientific knowledge but with a specific practical application in mind.

• Common in industrial settings seeking to create new products or processes.

c. Experimental Development

• The most common form of SR&ED work.

• Systematic work undertaken to achieve technological advancement for creating, improving, or modifying new materials, products, or processes.

2. Five Criteria for Eligibility

According to the CRA, SR&ED work must meet the following five key criteria:

i. Scientific or Technological Uncertainty

• The project must face uncertainty that cannot be resolved using standard practices.

• The outcome is not predictable based on existing knowledge or experience.

ii. Systematic Investigation

• The work must follow a systematic approach, such as the scientific method: identifying a problem, formulating hypotheses, experimenting, and drawing conclusions.

iii. Technological Advancement

• The purpose must be to achieve a gain in technological knowledge or capability, not just product development or troubleshooting.

iv. Content of Work

• There must be a record of the work performed, including documentation of hypotheses, tests, data, and conclusions.

v. Qualified Expenditures

• Eligible expenses may include salaries, materials, subcontractor costs, and overhead directly related to the R&D work.

3. What SR&ED Is Not

The SR&ED program does not cover:

• Market research or sales promotion

• Quality control or routine testing

• Commercial production or routine data collection

• Style changes or cosmetic updates

• Work outside Canada

Additionally, software development must meet the same standards — simple app creation or feature additions don’t qualify unless they involve significant technological challenges.

4. Examples of Eligible Work

• Developing a new algorithm to optimize logistics beyond known methods

• Creating a new manufacturing process that improves tolerances or speed

• Resolving unpredictable integration issues between complex systems

• Conducting experiments to overcome physical or technical limitations in hardware

5. Who Can Claim SR&ED?

Eligible claimants include:

• Canadian-controlled private corporations (CCPCs) – eligible for up to 35% refundable tax credits

• Other corporations – eligible for a 15% non-refundable tax credit

• Individuals, partnerships, and trusts – may also claim under certain conditions

Claimants must file Form T661 along with their corporate tax return (T2), generally within 18 months of the end of the tax year.

Final Thoughts

The SR&ED program represents a valuable opportunity for Canadian innovators to reduce the costs and risks associated with pushing technological boundaries. However, success depends on clear documentation, a methodical approach, and the presence of real technical uncertainty.

If you're unsure whether your project qualifies, consider consulting with an SR&ED specialist or reviewing CRA's guidance to ensure you don’t leave money on the table.

Resources:

• CRA SR&ED Overview

• Form T661 – SR&ED Expenditures Claim

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