The federal Scientific Research and Experimental Development Program offers a refundable tax credit to all types of small businesses, including sole proprietors, partnerships, and corporations. It may sound like it applies only to high-tech businesses, but that simply isn’t the case. Find out what you need to do to take advantage of the SR&ED tax credit.
What Is the SR&ED?
The SR&ED Program offers a refundable tax credit that is calculated on the amount you spend on work to perform scientific research and development. Any taxpayer can claim the credit, regardless of incorporation status. Since it is a refundable tax credit, you can receive a tax refund even if you do not have taxes to pay.
The credit is only a part of the greater SR&ED incentive program. There is also a provision that allows for the full deduction of certain equipment that would otherwise need to be capitalized. Most provinces also offer incentives for research and development.
Which Projects Qualify for SR&ED?
To qualify, the expenses must be related to work that represents systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis. Under the Income Tax Act, this includes basic research, applied research, and experimental development.
In more concrete terms, any work you undertake regarding engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research can qualify.
The definition is broad-ranging and can apply to many different types of businesses. However, the law specifically excludes the following activities from SR&ED:
Market research or sales promotion.
Quality control or routine testing of materials, devices, products, or processes.
Research in the social sciences or the humanities.
Prospecting, exploring, drilling for, or producing minerals, petroleum, or natural gas.
The commercial production of a new or improved material, device, or product, or the commercial use of a new or improved process.
Routine data collection.
Your project does not have to achieve a successful result. It only needs to be a legitimate scientific or research project.
How to Claim the SR&ED Tax Credit
To claim the SR&ED tax credit, you must complete Form T661 (Scientific Research and Experimental Development Expenditures Claim) along with either Form T2SCH31 (Investment Tax Credit – Corporations) or Form T2038(IND) (Investment Tax Credit – Individuals).
When calculating your credit, be sure to include expenses related to salaries, materials, overhead, third-party payments, and capital expenditures.
You need to have available for inspection by the Canada Revenue Agency all of the supporting technical and financial documents that show that you are carrying out your project in a serious and documented manner. For example, you should have project planning documents, design documents and technical drawings, and minutes of project meetings, along with photographs, videos, or other means of illustrating your project.