Do you qualify to get paid by the government for innovating in your business?
Administered by the CRA, the Scientific Research and Experimental Development Tax Incentive Program, or SRED program for short, is a federal tax incentive program. The purpose of the program is to encourage Canadian businesses to conduct research and development that will lead to technological advances in the country; and it does so by allowing qualified claimants to apply for cash refunds and/or tax credits for their spending on eligible R&D activities.
To claim for an SRED tax credit, you must file all of the following:
1. An income tax return
2. Form T661, SRED Expenditures Claim
3. One of the following two forms:
a. Form T2 SCH 31, Investment Tax Credit –Corporations, or
b. Form T2038 (IND), Investment Tax Credits –Individuals
To download these forms, follow this link: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/frh-eng.html
A complete claim should contain a narrative that details the three SRED claim criteria associated with each R&D project. Specifically, technological advancement within the business must be clearly stated as “pushing the boundaries of technology beyond what the current state of the knowledge base of the company”. Also, the narrative should describe the technological uncertainties and how experimental process was followed. In addition, the list of employees who participated and the list of materials related to each project must be included.
Who can apply?
Canadian-controlled private corporations (CCPCs), as well as other Canadian corporations, proprietorships, partnerships, and trusts can earn an investment tax credit on the amount of qualified SRED expenditures.
What kind of expenditures qualify?
The following activities qualify for SRED tax credits:
- Experimental development
- Applied research
- Basic research
- Support work
Note: Experimental Development
The key word here is “experimental”. To be eligible for a refund, the corporation must take an experimental approach in carrying out the R&D activity. For example, when attempting to develop or improve a product or process, the corporation should “experiment’ with things and resolve technical problems through different methods. A good example of an experimental approach is the “trial and error” method of resolving problems.
The following activities do NOT qualify for SRED tax credits:
- Social science and humanities research
- New or improved commercial production
- Style changes
- Market research
- Quality control
- Routine testing procedures
- Routine data collection
- Development based solely on design
The CRA website offers a simple tool to help you determine if the R&D activity you did meets the SRED requirements. To use the tool, follow this link: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/ssssmnt/menu-eng.html. Please note that the tool is intended for self-assessment and educational purposes only. So if you have any doubts about your eligibility for SRED tax credits or have any other questions, it is best to consult a professional.
When will payment be received?
A check will arrive 1-21 days after receiving the Notice of Assessment. Provided that the company is not indebted to CRA and all returns are up to date.
Again, if you have any concerns about your eligibility for SRED tax credits, or have any other questions in mind, please do not hesitate to contact us.