SR&ED – Tax Incentives for Startups

Fondly pronounced as SHRED, the Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive program for businesses who carry out eligible research and development projects. The SR&ED usually plays an important role in a start up’s financing by allowing enough runway for the start up until the products can be monetized.

In Canada, the SR&ED is administered by the Canada Revenue Agency. It comprises of two main incentives. The income tax credits and cash refunds based on eligible SR&ED expenditures. Through the various state governments, the role of this incentive is to support research, develop technology and retain skills in the labour market.

Claimants are able to obtain cash refunds or a reduction of the payable tax through the Investment Tax Credits. The amount of credits that one can claim usually depends on whether the claimant is a Canadian Controlled Private Corporation (CCPC). Non-CCPC’s are also eligible for the claims but can only recoup 15 percent of the SR&ED qualifying expenditure as credits that can be carried back for three years or carried forward for 20 years.

The work that qualifies as SR&ED should always adhere to the scientific method. It is also conducted with an aim of eliminating uncertainties that are not able to be removed using normal standard practice. The range of expenditures toward the SR&ED claims include salaries and wages of employees who directly perform or supervise the SR&ED or third-party components that result in the development of middleware, among others.

For expenditure to be allowed, it must be directly related to the SR&ED. If your business is conducting research and development, you might be able to benefit from the various benefits such as tax deductions, credits and refunds. Contact an expert at Swanson Reed R&D Tax Advisors today to find out whether your company qualifies.