The Ultimate SR&ED Guide: Everything you Need to Know About SRED Tax Credits

To maintain the competitive edge, many Canadian businesses devote vital resources to the scientific research and experimental development (SR&ED) of new products and methods. For some time now, the Canadian government has realized the benefits to the Canadian economy that are achieved through supporting both Canadian businesses to be more productive by investing resources into SRED and foreign companies to perform their sred in Canada. As a result, the Canadian tax benefits for sr&ed activities in Canada are among the most generous SR&ED incentives globally.

 

What is the SR&ED Program?

SR&ED is an acronym for Scientific Research and Experimental Development Tax Incentive Program, usually pronounced “SHRED.” Each year, the program provides more than $3 billion in tax incentives to close to 20,000 claimants, around 75% of which are small businesses – whose claim for R&D investments usually range from $20,000 to $2,000,000. To claim the tax credit, you have to undertake activities inside Canada that qualify as “Scientific Research and Experimental Development.” Examples include:

 

1. Developing new technologies

2. Developing new product prototypes

3. Developing or improving products and processes

4. Finding new applications for an existing technology

 

Who can claim SR&ED?

Different types of businesses will have different ways to access sr&ed and different rates. The major categories of companies eligible for the incentive are:

 

• Private corporations – CCPC (under Canadian control)

• Other corporations

• Individuals (proprietorships) and trusts

• Partnerships: Any items that are not tax-paying will not be eligible for tax credits, this refers to partnerships as well. 

 

How Your Business Can Benefit

If the work you’re doing qualifies, there are two main approaches your business can benefit:

1. You can diminish sr&ed expenses against your current or future income.

2. You can use the sr&ed investment tax credit (ITC) to decrease your income tax payable – and likely receive a tax refund.

 

Tips for Making Your SR&ED Claim Experience Painless

Claiming sred tax credits can be complicated. Here are 5 top tips for making your claims process as painless as possible:

 

1. Track hours like an agency or lawyer would. To avoid guessing or estimating later, have your team log everything to get it very clear how many times were spent on SRED-able projects. This also makes it clear who was concerned and what they did. 

 

2. Keep your books organized and clean. Work with your accountant to set up or adjust your chart of accounts to trace your SRED-able expenses individually. This will make all the difference when it’s a chance to put together your claim.

 

3. Check-in quarterly with your team and SR&ED consultant. Keep checks on how your tracking is looking, whether documentation is being made on an ongoing basis, whether the same workers are still working on a current project, and whether any new projects on the range may be eligible for sred. 

 

4. Make the most of your time & effort. If you're operating as a Canadian-controlled private corporation (CCPC) and you qualify for sr&ed. In that case, you’re likely eligible for other R&D funding programs.

 

5. Stay audit-ready. Keep all the records of all the SRED qualifying expenses you claim so that if you do get audited (which may occur every few years), the process will be as seamless as possible. 

 

Taking the time to set up and maintain your books and accounting practices in a way that allows you easily track and manage your SRED-able expenses will ensure your company is ready to claim.