Who Can Make SR&ED Claims?

It turns out you don’t necessarily need a lab coat, or need to be performing rocket surgery, to qualify for a Scientific Research and Experimental Development (SR&ED) claim. This tax incentive program is intended to encourage research and innovation to be done in Canada so businesses of all sizes, including small businesses, may be able to make an SR&ED claim as long as they are performing qualifying work.

Scientific Investigation and Technological Uncertainty

As a general definition, the Canada Revenue Agency (CRA) stipulates that work that “advances the understanding of scientific relations or technologies, addresses scientific or technological uncertainty, and incorporates a systematic investigation by qualified personnel” is eligible for SR&ED tax credits.
Put plainly, any research and development (R&D) or work done for the advancement of scientific knowledge or for technological advancement is considered to qualify as SR&ED work. This work might include the development of a new product or manufacturing method or even invest in environmentally-friendly production processes, all for the intentions of creating new knowledge (and competitive advantage) in the company.

Types of Companies that can apply for SR&ED

Should your business perform this type of work in Canada, you may be eligible for a credit on qualifying expenditures related to the work such as salaries and wages, purchased materials, SR&ED contracts, overhead, and third-party payments (ie. universities). Tax credits from SR&ED projects can be used to reduce your income taxes payable.

Canadian Controlled Private Corporations (CCPC)

Some of the biggest tax benefits when it comes to SR&ED claims go to corporations that are considered Canadian Controlled Private Corporations (CCPCs). To be defined as a CCPC, a corporation must be privately owned, reside in Canada, and be incorporated in Canada. The CRA also stipulates that a CCPC is not controlled by any combination of non-residents, public corporations, or corporations whose shares are listed on any stock exchange.
If a corporation can be defined as a CCPC, it can typically earn a 35% “refundable” SR&ED investment tax credit which can be applied up to a maximum of the first $3 million of qualifying expenditures. Then, a 15% “non-refundable” investment tax credit can be earned on expenditures after the first $3 million.

Other corporations

Even if your business cannot be considered a CCPC for any of the above reasons, you may still qualify for a “non-refundable” SR&ED tax credit. The CRA defines “other private corporations” as non-public corporations that reside in Canada. The CRA also stipulates that other private corporations are not controlled by any combination of public corporations or federal Crown corporations.
If your business can be considered among the “other private corporations,” you can typically qualify for an “non-refundable” investment tax credit of 15% of qualified expenditures for SR&ED work that is carried out in Canada.

Individuals and trusts

For individuals and trusts that perform SR&ED work and have qualifying expenditures, an investment tax credit of 15% can be earned and it is refundable. However, the credit must first be applied to payable tax in the current tax year before the refund can be issued. After that, 40% of the remaining credit can be refunded.

Partnerships

A partnership is not a taxpayer so the partnership itself cannot earn an investment tax credit. However, for qualifying SR&ED work done by a partnership in Canada, a tax credit of 15% of qualified expenditures can be earned. This tax credit is calculated at the partnership level and then allocated to its individual members who are eligible for the investment tax credit. The respective amounts of allocated credit are determined by each individual’s reasonable share of both income and loss in the partnership which is agreed upon by the partners.