Canada SR&ED Tax Credit Guide

the Scientific Research and Experimental Development (SR&ED) tax credit in Canada. The SR&ED is the Canadian government's tax incentive program for the research and development. The investment tax credit (ITC) is available to the corporations, the individuals (the sole proprietors), the partnerships, and the trusts. The CCPC (Canadian-controlled private corporation) can claim the 35% ITC on the qualified SR&ED expenditures (the "refundable ITC" — the "refundable credit" — if the CCPC has the taxable income below $500,000 in the prior year and the taxable capital below $10 million). The non-CCPC (the public corporations, the foreign-owned corporations) can claim the 15% ITC (the "non-refundable ITC" — the credit can be carried forward 20 years and carried back 3 years). The qualified SR&ED expenditures include the salary and the wages of the SR&ED employees (the "SR&ED salary" — the direct, the supervisory, and the supporting wages), the materials (the "SR&ED materials" — the supplies consumed in the SR&ED project), the overhead (the "prescribed proxy amount" — 55% of the direct salary, or the "traditional method" — the actual overhead costs), and the third-party payments (the "SR&ED contracts" — the payments to the research institutes, the universities, and the other SR&ED contractors). The SR&ED claim process — the Form T661 (the "Claim for the Scientific Research and Experimental Development Expenditures") is filed with the T2 corporate tax return. The SR&ED project must meet the "technological uncertainty" test (the "scientific or the technological advancement" — the "systematic investigation" to resolve the technological uncertainty). The provincial SR&ED credits — the Ontario SR&ED credit (the "Ontario Innovation Tax Credit" — the OITC at 10%), the Quebec SR&ED credit (the "Quebec Research and Development Tax Credit" at 14%).

SR&ED Eligibility

Technological uncertainty: The project must address the "technological uncertainty" — the uncertainty about the "technological feasibility" (the "unknown outcome" — the "scientific or the technological advancement"). The routine development (the "standard engineering" — the "routine modifications") does NOT qualify.
Systematic investigation: The project must involve the "systematic investigation" — the "scientific method" (the hypothesis, the experiment, the analysis, the conclusion). The "trial and error" without the systematic approach does NOT qualify.
Technological advancement: The project must achieve the "advancement of the scientific knowledge or the technological capabilities" — the "new knowledge" (the "new or the improved product", the "new or the improved process"). The "application of the existing technology" does NOT qualify.
Qualified activities: The "basic research" (the "original investigation for the advancement of the scientific knowledge"), the "applied research" (the "investigation for the practical application of the scientific knowledge"), and the "experimental development" (the "work to achieve the technological advancement").

SR&ED Expenditures

Salary and wages: The "direct SR&ED salary" (the salary of the employees working directly on the SR&ED project), the "supervisory salary" (the salary of the managers supervising the SR&ED project), and the "supporting salary" (the salary of the technical support staff). The salary must be the "reasonable" amount.
Materials: The materials "consumed or transformed" in the SR&ED project (the "SR&ED materials" — the supplies, the chemicals, the prototypes, the test units). The materials must be "used in the SR&ED project" (the "direct use" test).
Overhead (proxy method): The "prescribed proxy amount" — 55% of the direct SR&ED salary (the "proxy overhead" — the overhead is calculated as 55% of the direct salary without the need to track the actual overhead costs). The proxy method is the "simpler" method (the "prescribed proxy" — the "T661 proxy election").
Overhead (traditional method): The "actual overhead" — the rent, the utilities, the insurance, the office supplies, the maintenance, and the CCA on the SR&ED equipment. The traditional method is the "detailed method" (the "actual overhead" tracking).
Third-party payments: The payments to the "SR&ED contractors" — the research institutes, the universities, the CCTT (the Quebec college centres for the technology transfer), and the "arm's-length" SR&ED service providers.

SR&ED Claim Process

Form T661: The "Claim for the Scientific Research and Experimental Development Expenditures" — the form is filed with the T2 corporate tax return (or the T1 return for the sole proprietors). The T661 includes the project descriptions (the "SR&ED project descriptions" — the "technological uncertainty", the "systematic investigation", the "technological advancement" narratives).
Filing deadline: The T661 must be filed within 18 months of the fiscal year-end (the "SR&ED claim deadline"). The late claims (the "out-of-time" claims) are NOT accepted by the CRA (the 18-month deadline is the "hard deadline").
SR&ED review and audit: The CRA reviews the SR&ED claim and may conduct the "SR&ED audit" (the "technical review" — the CRA's SR&ED reviewers assess the eligibility of the project). The CRA may request the "project documentation" (the "technical records" — the laboratory notes, the test results, the meeting minutes, the project reports).

For the corporate tax rules and the CCPC small business deduction, see our Corporate Tax Guide →. For the capital cost allowance and the depreciation rules, see our CCA Guide →.