The Scientific Research and Experimental Development Program,
also known as "SR&ED" (pronounced "shred"),
is a federal tax incentive program for businesses carrying out
eligible research and development activities. SR&ED can play an
essential role in a startup's financing by extending runway
until products or services can be monitized. SR&ED is not just
for large businesses; startups have equal access to the
SR&ED is administered by the Canada Revenue Agency
("CRA") and is comprised of two main incentives: (1)
income tax credits and (2) cash refunds based on eligible SR&ED
expenditures. The Canadian government's purpose behind
SR&ED is to support research in Canada, retain skilled labour
and develop leading-edge technologies.
Key Concept: Investment Tax Credits
Through Investment Tax Credits ("ITCs"), claimants may
be able to obtain a cash refund or a reduction of taxes payable (or
both) for qualifying SR&ED expenditures. The amount of ITCs
that can be claimed depends on whether a claimant is a
Canadian-Controlled Private Corporation ("CCPC") –
a private corporation that resides in Canada and is controlled by
Canadian shareholders.1 A CCPC qualifies for
preferential rates of ITCs.
In general, a CCPC with taxable income of $500,000 or less can
claim ITCs at a rate of 35% on SR&ED expenditures up to a
maximum of $3 million, plus additional provincial credits dependant
on where the claimant's headquarters are located. A CCPC that
exceeds this $3 million threshold can claim credits at a rate of
15% on the excess.
Non-CCPCs are eligible for ITCs, but they may only recoup 15% of
qualifying SR&ED expenditure as credits that can be carried
back three years, or carried forward 20 years. This carrying back
or forward can help to reduce past tax liabilities or offset future
taxes payable when a company is not currently profitable. Moreover,
if the total value of ITCs exceeds the taxable income limit in a
given year, allocating the excess to other years can also help to
capture value from the ITCs that would otherwise be lost.
Types of Work that Qualify as SR&ED
Work qualifying as SR&ED must adhere to the scientific
method. It must also be conducted with an aim to eliminating a
scientific or technological uncertainty that cannot be removed by
standard practice. While the work will be eligible if it creates
new or improves pre-existing products, it does not have to have a
specific practical application.
A range of expenditures toward SR&ED can be claimed. These
salaries and wages of employees who
directly perform or supervise the SR&ED, including but not
limited to activities related to performance or scalability
challenges leading to new algorithms or methods;
integration of third-party components
resulting in development of middleware;
failed prototypes requiring
additional expenditures and time to resolve; and
extending software to new platforms
An expenditure must be directly related to the SR&ED in
order for it to be allowable. Further, all or substantially all of
such expenses must have been incurred for SR&ED purposes and
the intellectual property must be owned by the potential applicant.
Eligible companies have 18 months from the end of the fiscal year
in which the activity took place to submit a claim. Applicants
commonly claim years back-to-back as projects tend to overlap
The SR&ED program provides businesses with incentives for
pursuing scientific and technological research and development. If
your business is conducting research and development, you may be
able to benefit from tax deductions, credits and refunds. Check the
CRA website for more information on how to qualify for the
* This article was drafted with assistance from Chris
Bodnar, PwC SR&ED Corporate Development Manager.
1. Designation of the CCPC status is determined by the
provisions of the Income Tax Act (Canada).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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