Scientific Research and Experimental Development
SR&ED Programs & Incentives
What is Scientific Research and Experimental Development?
The formal definition of scientific research and experimental development (SR&ED) is to mean the “systematic investigation or search carried out in a field of science or technology by means of experiment or analysis”. This can involve research in engineering or design, operations research, mathematical analysis or computer programming, data collection, testing and psychological research. The ITCs and deductions related to SR&ED were meant to increase the competitiveness of Canadian companies in the global market.
Do I Qualify for SR&ED? Let’s Find Out!
What SR&ED activities can qualify for deduction?
On a general level, all of the activities listed above can qualify for SR&ED deduction. Some activities that are not allowed to be claimed as a deduction are market research and sales promotion, quality control or routine testing, social science or humanities research, natural resource exploration, commercial development of material, products or processes, style changes or routine data collection. It is also important to ensure that the activities are experimental in nature and do not involve routine engineering or routine development.
How do I deduct qualified expenditures? What are my options?
Most SR&ED expenditures including associated capital purchases are fully deductible in the year that they are incurred; however the amounts that are not deducted are placed in a pool and can be deducted in any future with an indefinite carry forward period OR the taxpayer has the option to claim ITCs on the amounts in the SR&ED pool to offset positive tax payable (limited to a three year carryback and twenty year carryforward). It is important to note that the SR&ED pool is reduced by any investment tax credits (ITCs) deducted from the tax that is related to these expenditures. For Canadian controlled private corporations the available ITC is 35% of the first $3 million in qualified expenditures and 20% for any excess over that (20% for other corporations, sole proprietorships, partnerships and trusts). These ITC’s are refundable and serve as a form of subsidy to encourage SR&ED activity.
Final Wrap-Up
Overall SR&ED deductions are a very crucial aspect of tax planning due to the fact that these deductions can amount to substantial tax savings. It is especially important for companies that have heavy research expenditures and little income, as these deductions can be deferred to tax years where the business in earning higher amounts of income. In closing, it is important to ensure that your tax planner is well versed in making SR&ED claims, as this can amount to large savings for you and your business! To learn more, visit the CRAs website on SR&ED.