Overview
The Scientific Research and Experimental Development (SR&ED) program is Canada’s largest federal tax incentive for businesses — and one of the most generous R&D programs in the world. Under ITA s.37 and s.127, businesses that carry out qualifying R&D activities can claim an Investment Tax Credit (ITC) against eligible expenditures.
For Canadian-Controlled Private Corporations (CCPCs), the federal credit rate is 35% refundable on the first $3 million of eligible expenditures. “Refundable” means that if you don’t owe corporate tax, the CRA writes you a cheque for the credit — making SR&ED valuable even for early-stage companies that aren’t yet profitable.
On $500,000 of eligible expenditures, a CCPC could receive $175,000 back from the CRA — in cash.
What Qualifies as SR&ED Work
SR&ED is not limited to white-lab-coat laboratory research. It covers three types of work:
- Basic research — advancing scientific knowledge without a specific practical application
- Applied research — advancing scientific knowledge with a specific practical application in view
- Experimental development — creating or improving materials, devices, products, or processes through systematic investigation (this is where most businesses qualify)
The key test is whether the work involved resolving a scientific or technological uncertainty — meaning you couldn’t find the answer in existing knowledge or standard engineering practice. You had to experiment.
Examples that often qualify:
- Developing new software where the architecture or algorithm wasn’t achievable using known techniques
- Engineering a product with novel performance characteristics
- Testing new manufacturing processes with uncertain outcomes
- Designing custom hardware or embedded systems
Examples that typically don’t qualify:
- Routine software development using established frameworks and methods
- Minor modifications to existing products
- Market research or social science research
- Style changes or aesthetic improvements
- Quality control and routine testing
What Expenditures Are Eligible
For work performed in Canada, eligible expenditures include:
- Employee salaries and wages for time spent on SR&ED (the largest category for most companies)
- Contractor/subcontractor costs — 80% of amounts paid to arm’s-length contractors, or 100% if the contractor is an associated CCPC
- Materials consumed or transformed in the SR&ED work
- Overhead and other expenditures (limited)
Capital expenditures (equipment) were removed from SR&ED eligibility after 2013. You can no longer claim the cost of equipment as an SR&ED expenditure, though depreciation of equipment used exclusively for SR&ED may still qualify as overhead in some cases.
Federal Credit Rates
| Type of Claimant | Rate | Refundable? | Expenditure Limit |
|---|---|---|---|
| CCPC (small, active business) | 35% | Yes (fully) | First $3M of expenditures |
| CCPC (above $3M or after grind-down) | 15% | No | Unlimited |
| Other corporations | 15% | No | Unlimited |
| Individuals, partnerships | 15% | Partially | N/A |
CCPC expenditure limit grind-down: The $3M eligible expenditure limit is reduced dollar-for-dollar when taxable capital of the associated group exceeds $10M, and eliminated at $50M. Most small CCPCs are well below these thresholds.
Provincial Credits
Most provinces offer additional SR&ED credits on top of the federal credit. Combined with the federal 35%, small Ontario CCPCs can receive up to ~46% back on eligible expenditures:
| Province | Provincial Rate | Refundable? |
|---|---|---|
| Ontario | 8% | Partially |
| BC | 10% | Yes |
| Quebec | 14–30% | Yes |
| Alberta | 8% | No |
| Atlantic provinces | 15% | Yes |
How to File
SR&ED is claimed on your T2 corporate return using:
- Form T661 — Scientific Research and Experimental Development Expenditures Claim (technical and financial description of the work)
- Schedule 31 — Investment Tax Credit for SR&ED
The technical narrative (Form T661 Part 2) requires you to describe:
- The scientific or technological uncertainty you faced
- The work you did to resolve it
- The advancement in knowledge you achieved
Filing deadline: SR&ED claims must be filed within 18 months of the end of the fiscal year in which the work was performed. Missing this deadline forfeits the claim permanently.
Using an SR&ED Consultant
Most companies filing SR&ED claims use a specialized SR&ED consultant or tax firm. They typically work on contingency (15–25% of the credit received), so there is no upfront cost. For a first-time claim especially, a consultant who knows what language the CRA wants to see in the technical narrative can significantly improve both the success rate and the amount recovered.
The CRA’s SR&ED Technical Review process involves a technical officer reviewing your project descriptions — poor documentation is the most common reason claims are reduced or denied.
Common Mistakes
- Not claiming because you think the work is too routine — many software and product development activities qualify; get an opinion before assuming you don’t qualify
- Missing the 18-month filing deadline — non-extendable, no exceptions
- Insufficient documentation — keep project logs, design documents, test records, and developer time-tracking contemporaneously (not reconstructed at tax time)
- Not tracking employee time by project — without time records showing how long employees spent on SR&ED work vs. other work, the claim amount is unverifiable
Frequently Asked Questions
We build software for clients. Does custom software development qualify for SR&ED?
Sometimes. The test is not whether the software is new or custom — it’s whether your developers faced a technological uncertainty that couldn’t be resolved using standard techniques or existing knowledge. Building a standard web app with well-established frameworks typically does not qualify. Developing a novel algorithm, a new data processing architecture, or solving a performance challenge that required experimentation beyond known methods often does. Document the specific technical problems you encountered and how you investigated them.
Our startup is not profitable yet. Can we still get money back from SR&ED?
Yes — this is one of SR&ED’s biggest advantages for early-stage companies. The 35% federal credit for small CCPCs is fully refundable, meaning the CRA will send you a cheque for the credit amount even if you have no tax payable. A CCPC that spent $500,000 on salaries for eligible R&D work and paid zero corporate tax can still receive $175,000 in federal SR&ED credits in cash.
Can we claim SR&ED on work done by contractors rather than our own employees?
Yes. Payments to arm’s-length contractors for SR&ED work performed in Canada are eligible at 80% of the amount paid. If the contractor is an associated CCPC (a related company), 100% of qualifying payments are eligible. Contractor SR&ED claims require that the work itself is SR&ED — you can’t claim contractor payments for non-qualifying development work just because you believe the overall project qualifies.
We did eligible R&D work two years ago but didn’t file a SR&ED claim. Can we go back and claim it?
You have 18 months from the end of the fiscal year in which the work was performed to file a SR&ED claim. After that, the claim is permanently forfeited. There is no mechanism to extend this deadline or amend a return to add a SR&ED claim beyond the 18-month window, regardless of circumstances.
What documentation should we keep to support a SR&ED claim?
The CRA expects contemporaneous documentation (created at the time of the work, not reconstructed later) including: project logs and notes describing technical challenges, hypotheses, experiments and results; version control records and code commits for software; design documents, drawings, and test results for engineering work; time-tracking records showing hours spent on SR&ED activities by each employee; and purchase records for materials. The stronger your documentation, the smoother the CRA technical review.