1. Canada’s Federal Scientific
Research and Experimental
Development Tax Incentive
Program (SR&ED)
Vania Karam, CPA, CRM, MA Econ, 2016

2. 1
Why? The SR&ED is a popular tax measure for SMEs
What? The SR&ED provides broad-based R&D support, with targeted support for SMEs
Who? Benefits available through the SR&ED vary by type and size of business
How? Simple examples to show how the federal SR&ED works
Eligibility? There are a number of different activities that qualify for the SR&ED
Issues? The significant burden with preparing claims is a longstanding concern for SMEs
Changes? Further to the Jenkins Panel recommendations, Budget 2012 made
improvements to the SR&ED

3. 2
 SR&ED is viewed as a cost-effective way to incentivize R&ED and promote ICT adoption.
 SR&ED produces an 11% return on investment to the Canadian fiscal system1.
 SMEs tend to invest proportionately more of their revenue in R&D than larger firms.
 ICT accounts for 35% of private-sector R&D in Canada and SR&ED is often used by ICT firms2.
 A company does not necessarily have to be profitable to benefit from the SR&ED.
 There is a refundable component that provides ‘cash-in-hand’ to incentive R&D expenditures, a
key point for cash-strapped start-ups.
 For very small start-up technology companies that are not yet earning profits, the SR&ED can
cover almost half of their R&D budgets and improve their working capital position.
 Many smaller companies are bought and sold for the sole purpose of taking advantage of
accumulated SR&ED credits.
 Provinces have similar tax incentives that complement the federal SR&ED (see Annex).
1 Source: M. Parsons and Phillips, “Tax Incentives for Scientific Research and Experimental Development,” Consultation Paper, Finance Canada, 2007.
2 Source: Information Technology Association of Canada, “The Issue: The Importance of the SR&ED to ICT R&D”, 2012.

4. 3
 The SR&ED is the largest federal program for supporting R&D in Canada, and provides
over $3.1 billion in tax assistance to Canadian firms, including $1.37B in cash credits.
 The rationale for the SR&ED is two-fold:
 In the absence of the SR&ED, firms would perform less R&D than is optimal; and
 R&D results in spillover effects that benefit other firms and sectors of the economy.
 The SR&ED is particularly useful for SMEs and start-ups that conduct R&D to create new,
improved, or technologically advanced products and processes.
 SR&ED expenditures can be applied as a deduction against business income taxes payable, with
any unused amounts carried forward indefinitely.
 SMEs may also qualify for an investment tax credit (ITC) against taxes payable. Unused non-
refundable ITCs can be carried back three years and forward 20 years.
 For small firms, after reducing taxes to zero, any remaining ITC may be refunded in cash.

5.  Small and medium-sized Canadian-controlled private corporations (CCPCs) receive a fully
refundable ITC at an enhanced rate of 35% on the first $3 million in qualified SR&ED
expenditures, and a 40% refundable ITC on qualified expenditures in excess of $3 million.
 If taxable income exceeds $500K, or taxable capital exceeds $10 million, access to the fully
refundable ITC is restricted (For example, the $3 million expenditure limit is reduced by $10 for
each dollar by which the prior year’s taxable income exceeds $500K).
 Larger CCPCs with taxable income over $800K or taxable capital over $50 million cannot receive
the refundable ITC.
 For non-CCPCs, the general ITC rate is 15% in 2014 and subsequent taxation years, and
they are generally eligible for a 40% refund.
 Where a CCPC is part of a group of associated corporations, the annual expenditure limit
for purposes of calculating the ITC must be shared amongst the group of corporations.
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6. 5
 A small CCPC has $4 million in SR&ED
expenditures (where the CCPC is not part of an
associated group of corporations).
 The CCPC would receive a fully refundable ITC
at an enhanced 35% rate on the first $3 million
in qualified expenditures and a 40% refundable
ITC at a 35% rate on the additional $1 million
in expenditures.
 Thus, the total ITC value is $1.19 million.
 100% x $3 million x 35% = $1.05 million
 40% x $1 million x 35% = $140K
 Assuming the CCPC had no tax payable, the
entire $1.19 million would be paid out as a
refundable tax credit (credits are paid out 3-4
months after the tax filing date).
 A medium-sized CCPC has $600K in taxable
income and $10 million in qualified SR&ED
expenditures.
 The $3 million expenditure limit to access
the fully refundable 35% ITC is reduced by
10 x $100K = $1 million.
 Thus, the total ITC would be $1.82 million.
 100% x $2 million x 35% = $700K
 40% x $8 million x 35% = $1.12 million
 If the CCPC had $1 million in tax payable:
 The ITC reduces tax payable to zero; and
 The remaining ITC is then paid out as a
refundable tax credit of $820K.

7.  SR&ED eligibility is assessed according to three criteria:
 Scientific or technological advancement;
 Scientific or technological obstacle/uncertainty; and
 Scientific or technological content.
 SR&ED activities must involve systematic investigation or search carried out in science
and technology by means of experiment or analysis.
 Activities that qualify: Experimental development; applied and basic research; engineering;
design; mathematical analysis; computer programming; and testing.
 Activities that do not qualify: Market research; routine testing and data collection; research in
social sciences or humanities; commercial production; and style changes.
 SR&ED allows for firms to claim previously allocated spending on R&D (versus a
program like IRAP that is focussed more on the pre-activity R&D stage)
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8.  While the SR&ED is an important incentive for Canadian corporations that carry out
internal R&D activities, many SMEs have raised concerns over the administrative burden
associated with filing claims.
 Businesses must provide a record of the percentage of time their staff spent on eligible
activities, explain the R&D that was conducted, how it advanced its understanding of the
issue being addressed, and how the R&D helped it to overcome a technical obstacle.
 Companies often use accounting firms to prepare SR&ED claims. They may also incur
significant legal expenses to prove eligibility of expenditures.
 CRA is taking steps to reduce the tax compliance burden associated with the SR&ED,
including:
 A pilot to assess the feasibility of a formal pre-approval process for SR&ED claims; and
 Online and in-person services to help claimants better understand the program’s eligibility
requirements.
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9.  The “prescribed proxy amount” used to compute overhead expenditures was reduced
from 65% to 55% of direct labour costs to limit instances where credits are granted for
overhead costs that exceed the actual costs incurred.
 The percentage of contract payments used for calculating SR&ED credits was reduced to
80% to remove the profit element from arm’s length contract payments.
 Capital was removed from the expenditure base, while other elements (salary & wages,
materials, overhead and contract payments, remain eligible). This change was met with
mixed reviews:
 Capital expenditures were one of the most complex components of the SR&ED and so their
removal from the list of eligible expenditures simplified the claims process.
 However, for firms that incur significant capital expenditures for R&D purposes, the loss of this
element has diluted the value of the tax measure for those firms.
 The general ITC rate was reduced from 20% to 15% to address the issue of growing pools
of unused ITCs.
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10. R&D tax incentive Description Limits Availability Eligible Expenditures
Ontario R&D Tax Credit
(ORDTC)
Non-refundable 4.5% credit for
eligible expenditures
Can be carried back 3 yrs and forward 20
yrs to reduce ON corp. income tax
payable (but not to a tax year that ends
before Jan. 1, 2009)
Corps with a
permanent
establishment in
Ontario after Dec. 31,
2008
Expenditures eligible for the
federal SR&ED credits carried out
in ON
Ontario Innovation Tax
Credit (OITC)
Refundable 10% credit for
qualified expenditures (any
OITC in excess of tax otherwise
payable will be refunded)
Annual expenditure limit of $3M of
qualified expenditures phased out when a
corp’s taxable paid-up capital for
preceding tax yr exceeds $25M
(eliminated at $50M in capital). Limit
also phased out when taxable income for
the preceding tax yr over $500K but not
over $800K
Ontario Business Research
Tax Institute Tax Credit
(OBRITC)
Refundable 20% credit for
qualified expenditures (any
OBRITC in excess of tax
otherwise payable is refunded)
$20 million annual cap that must be
allocated within an associated group of
corps
Corps, incl. those that
are members of
partnerships (other
than specified
members) with a
permanent
establishment in
Ontario
Qualified expenditures on SR&ED
work performed in ON under
contract with eligible research
institutes
Quebec SR&ED tax
measures
100% tax deduction for current
and capital SR&ED expenditures
On Dec. 3, 2014, introduced new
minimum thresholds starting at $50K per
claim for SR&ED in QC. SR&ED spending
below a specified threshold that starts at
$50K are excluded for corps with assets
of more than $50M
Corps with a
permanent
establishment in QC
Expenditures eligible for the
federal SR&ED credits carried out
in QC
Refundable 17.5% SR&ED credit Expenditures for wages paid in QC
Refundable 35% SR&ED credits
Expenses pursuant to: university,
public research centre or research
consortium contracts; pre-
competitive research contracts;
and dues and fees paid to an
eligible research consortium
* Filing deadlines: AB–15 months after filing due date; Federal/BC/NS–18 months after corporate year-end; MA/YK/NL–12 months after filing due date
** For all regions except Newfoundland & Labrador, eligible expenditures are reduced by government and non-government assistance, but not the related
provincial credit. The provincial credit will also reduce the federal pool of deductible SR&ED expenditures and qualified SR&ED expenditures. In most cases,
any recapture will crease or increase provincial tax payable.
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11. R&D tax
incentive
Description Limits Availability Eligible Expenditures
Alberta SR&ED
tax credit
Refundable 10% credit on up to
$4M in eligible expenditures
--
Corps with a permanent
establishment in Alberta, for
SR&ED activities carried out in
Alberta after Dec. 31, 2008
Expenditures eligible for the
federal SR&ED credits carried out
in AB. For years ending after Dec
31, 2012, eligible expenditure is
amended to follow the federal
reduction in the prescribed proxy
amount
British
Columbia
SR&ED tax
credit
Refundable 10% credit for CCPCs
up to the $3M expenditure limit
Otherwise, 10% non-refundable
credit for qualified SR&ED
expenditures
Can be carried back 3 yrs and carried forward
10 yrs to reduce BC tax payable
Corps with a permanent
establishment in BC. Credit
has been extended to allow
corps that are members of
partnerships to claim their
proportionate share of the
partnership’s SR&ED carried
on in BC, for qualified
expenditures after Feb 20,
2007
Rules parallel the federal SR&ED
rules relating to the definition of
SR&ED, qualifying expenditures,
and the expenditure limit. SR&ED
expenditures must be carried out in
BC
Manitoba R&D
tax credit
Non-refundable 20% credit on
eligible expenditures incurred
after Mar. 8, 2005, and 15% on
eligible expenditures before Mar.
9, 2005
Refundable credit for eligible
expenditures after 2009 for
corps that work with eligible
institutes in Manitoba
Non-refundable credits can be carried back 3
yrs and forward 10 yrs for yr ending after
2003 and carried back 3 yrs and forward 7 yrs
for yr ending before 2004 and applied against
MA tax payable
Manitoba’s 2010 budget extended
refundability of the credit to in-house R&D
expenditures (not undertaken by an institute
in MB). Refundable portion is ¼ in 2011 and
½ in 2012.
Corps, incl. trust beneficiaries
or that are members of a
partnership with a permanent
establishment in MB
Effective Jan 1, 2014, eligible
expenditures amended to: follow
the federal reduction in the
prescribed proxy amount; not to
follow the federal change to SR&ED
provisions disallowing capital
expenditures; and follow the
federal reduction to 80% of the
claimable portion of contract
payments with exception of
contract payments to eligible
education institutions in MA
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12. R&D tax
incentive
Description Limits Availability Eligible Expenditures
Saskatchewan
R&D tax credit
Non-refundable 15% credit for
eligible expenditures before Mar.
19, 2009, and refundable 15%
credit for eligible expenditures
after Mar. 18, 2009
Effective for qualifying R&D expenditures
incurred on or after Apr. 1, 2012, the
refundable R&D credit for CCPCs is subject to a
max. annual limit of $3M qualifying
expenditures; qualifying expenditures in
excess of this annual limit and qualifying
expenditures by non-CCPCs will be eligible for
a 15% non-refundable R&D tax credit
Non-refundable credits can be carried back 3
yrs and forward 10 yrs against SK tax payable
Corps, incl. trust beneficiaries or
members of a partnership, with a
permanent establishment in SK
Expenditures eligible for the
federal SR&ED credit carried out
in SK
Yukon R&D tax
credit
--
Corps with a permanent
establishment in YK at any time
in the yr, individuals that are
resident in the YK on last day of
the yr, incl. trust beneficiaries
and members of a partnership
Expenditures eligible for the
federal SR&ED credit carried out
in YK
Nova Scotia
R&D tax credit
Fully refundable 15% credit on
eligible expenditures
--
Corps, incl. those that are
beneficiaries of a trust or that are
members of a partnership, with a
permanent establishment in NS
Expenditures eligible for the
federal SR&ED credit carried out
in NS
Newfoundland
& Labrador
R&D tax credit
Fully refundable 15% credit on
eligible expenditures
--
Taxpayers, incl. corps and
individuals, beneficiaries of a
trust, and members of a
partnership, with a permanent
establishment in NL
Expenditures eligible for the
federal SR&ED credit carried out
in NL
New
Brunswick
R&D tax credit
Fully refundable 15% credit on
eligible expenditures after Dec.
31, 2002, and 10% non-
refundable credit on eligible
expenditures before Jan. 1, 2003
Non-refundable credits can be carried back 3
yrs and forward 7 yrs
Corps, incl. trust beneficiaries or
members of a partnership, with a
permanent establishment in NB
Expenditures eligible for the
federal SR&ED credit carried out
in NB
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