SRED is a program that has been in Canada since the ‘80s and supports individuals, partnerships, and corporations who carry out scientific research and experimental development by giving them tax incentives. It’s a program that was initiated by the government to place Canada in a more competitive position economically and technologically compared to the rest of the world. This program encourages businesses in all sectors and sizes to take part in research and development to innovate and introduce new products and services.
SR&D Program that provides at least $ 3 billion in tax incentives to more than 20,000 claimants annually, offers tax incentives in three structures: an investment tax credit (ITC), an income tax deduction, and in some instances, a refund. This top–notch federal program is supervised by the Canada Revenue Agency (CRA).
Three criteria must be met for a project to be eligible for SR&ED. The first one is Scientific & Technological Advancement which involves furthering knowledge. The second one is Scientific & Technological Uncertainty whereby there are uncertainties and challenges. Finally, there’s the Scientific & Technological content that consists of iteration processes that are trying to overcome the challenges and uncertainties.
The Canadian Revenue Authority determines the eligibility of a project by asking five questions.
- Was there a technological or scientific uncertainty that could not be cleared away by standard practice? This means there has been advancement in the current state of technology to improve a capability. A case in point could be a toy car manufacturing plant but cannot produce large volumes to meet customer demand. Such a company would have to carry out research and development to come up with a solution to increase the output volume to meet customer demand.
- Has the effort involved the formulation of a hypothesis particularly directed at scaling down or annihilating the uncertainty? A hypothesis is described as an objective to explain the reason for limited information at the beginning of more investigation. It means the attempt made to resolve the unknowns before the start of the experimentation. For example, a toy manufacturer could have developed new methods of advancing technology by analyzing various prototypes while at the same time testing the original hypothesis.
- Was the adopted process in line with the total objective of the scientific method, including the formulation, testing, and modification of the hypothesis? When the CRA asks you this question, they are trying to establish that you have thought through the method needed to identify the advancement that is to be achieved. In other words, they want to know if the hypothesis can be achieved.
- Did the outcome of the process lead to technological or scientific advancement? If you did not achieve the technological or scientific objectives as a result of challenges, then you qualify for SR&ED. This is because the challenges have paved the way for you to advance your technical or scientific knowledge.
- Were the tests and results of the hypothesis recorded as the work progressed? If you are going to get any tax credits, proof of is required. Good record keeping is a plus here.
If all the five questions have been answered to CRA’s satisfactory, then you, your company, or organization is eligible for SR&ED. Go ahead, apply, and be among the thousands that receive tax incentives from their research and development.