Did you know that if your small business conducts research or development, it can qualify for a tax credit of 15% to 35% for eligible expenses? We hear you scoffing already: “Research and development for my tiny business? Only big companies with lots of money and employees have R&D projects!”

If that’s how you feel, then you’ll welcome what this article has to say, because even solo business owners can qualify for this tax credit. Research can be as basic as using computer data to look for ways to solve a specific problem in your company. 

In this article, we’ll help you understand:

  • What exactly SR&ED tax credits are
  • Who is eligible for it
  • How to claim it
  • When the claim deadline is
  • How to calculate the claim
  • When it will be received

When you’re working with scientific or technological advancements, an SR&ED claim may be just what you need to help your business grow quickly and substantially.

Let’s dive deeper…

Key Takeaways
  1. If your company makes advancements in science or technology, it may be eligible to claim SR&ED and investment tax credits.
  2. Your business does not need a formal R&D department to qualify for this tax credit.
  3. Qualified expenses can be eligible for a 15% to 35% refundable tax credit.

What is the Scientific Research and Experimental Development (SR&ED) tax credit?

The SR&ED tax credit is designed to encourage small Canadian businesses to conduct research and development. In fact, over 20,000 companies receive more than $3B in SR&ED tax credits each year. And the business doesn’t have to have a formal R&D department to qualify.

The truth is, this tax credit is often used by entrepreneurs in unexpected industries, including:

  • Food and beverage
  • Software
  • Technology
  • Healthcare
  • Manufacturing

This is important because for the purposes of receiving this tax credit, research and development are not as complex as they might sound. 

The SR&ED is a combination of two tax incentives. One allows you to claim a deduction against earned income, and the other lets you earn an investment tax credit.

How does the SR&ED tax credit work?

This tax credit makes businesses entitled to a refundable tax credit of 15% to 35% of eligible SR&ED expenses. These expenses must be related to qualifying research and development and can include materials, overhead costs, and employee or contractor pay.

Let’s say a small manufacturing company creates products that generate higher-than- desired carbon emissions. It wants to resolve the problem and conducts systemized data collection—using technology—to determine what alternatives exist. The company can then use sophisticated software to analyze the results and implement technological advancements to address the issue.

Perhaps the company paid an independent contractor to collect data. And another contractor provided computer programming to analyze the data. These are two examples of qualified expenses the company could claim.

Here’s the thing: The company qualifies for the SR&ED tax credit even if it doesn’t implement changes or eliminate the problem. The process of researching the problem is what qualifies.

The work must be done using a systematic investigation or search, and it must be done for the purpose of making advancements in science or technology.

Who is eligible for a SR&ED claim?

Independent contractors, small businesses, Canadian corporations, trusts, and partnerships are all eligible for SR&ED credits, as long as the work qualifies

If the reason you’re conducting the work is to advance science or technology, and you use a systematic means of experiment or analysis, your work may be eligible for a SR&ED claim.

How much can I get back from SR&ED?

This is a refundable tax credit, which means you may get a tax refund, or it may reduce your tax balance due if there are enough qualifying expenditures. Most businesses receive 15% of qualifying expenses. However, a Canadian-Controlled Private Corporation can receive 35%. 

The maximum refundable amount is $3,000,000. And while it may be awhile before your business invests that much, even beginners can benefit. If your new business invested $10,000 in eligible SR&ED expenses, for example, you may be entitled to receive a tax credit of $1,500.

What expenses qualify for SR&ED?

Eligible expenses are those that support the research and development process. Support services can include data collection, computer programming, engineering, design, and testing.

It’s important to note that support-service expenses do not qualify for the SR&ED tax credit when they’re not conducted for scientific or technological advancement. R&D that’s meant to commercially improve a product, for instance, is not eligible for this credit.

How to calculate the SR&ED tax credit

The first step is to keep research and development expenses separate from other business expenses. Remember that only certain expenses are eligible for this credit. Here are a few examples that are more specific:

  • Basic research—such as using computer data to study noise pollution from a construction zone project.
  • Applied research—such as attempting different processes to determine better traffic flow in urban areas.
  • Experimental development—scaling and optimizing processes that produce the least amount of carbon.

Do not include expenses related to commercial development, such as sales promotion, training, routine quality control, or style changes.

How do I claim my SR&ED tax credit?

You’ll claim SR&ED tax credits by filing Form T661. This form is designed to help calculate the expenses you’re allowed to deduct and claim them alongside your income tax return. When filling out the T661, you’ll list and tally your pool of expenditures first, then break out those allowable for your SR&ED projects.

When is the claim deadline?

SR&ED credit claim deadlines are based on the type of business you own. The claims are due 12 months after that deadline.

Individuals and solopreneurs, for example, are required to file income tax returns by June 15th. Claims for SR&ED tax credits are due within 12 months of that date, or 17.5 months after the tax calendar year.

Corporations must file income tax returns within six months of the end of the tax year, while trusts do so within 90 days. Thus their SR&ED claim deadlines are 18 months and 15 months respectively.

When will SR&ED credits be received?

Generally, your SR&ED claim is processed within 60 days of it being received by the Canada Revenue Agency (CRA). Sometimes refundable claims are selected for review. If this happens, your credit could be delayed longer, to 120 days (180 total).

If your claim needs additional documentation or further review, this can also cause delays.

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