From startups developing new solutions to established companies innovating on existing methods, many Canadian businesses engage in innovative activities to advance their products, processes, or technologies. And while the constant push for progress is great, it can prove costly.
The good news? The Canadian government recognizes this and created the Scientific Research and Experimental Development (SR&ED) program to offer tax incentives that lighten the financial load of innovation.
In this blog post, we’ll get into what kind of work is eligible and the criteria you need to meet to help you determine if your organization can receive financial support through SR&ED.
Let’s dive in!
Key requirements for SR&ED
To tap into the SR&ED program, your work must meet two critical criteria that have to do with the why and how of your work.
The why: advancement of scientific or technological knowledge.
The how: systematic investigation. The work must involve a systematic investigation or search, carried out through experiment or analysis.
What counts as SR&ED work?
SR&ED work falls into several categories, each with its own set of guidelines:
Basic research
This is research purely aimed at advancing scientific knowledge without a specific practical application in mind. For example, researching a new virus to better understand it. This high-level research is mostly done in universities and leading research institutions, with findings typically shared through scientific journals.
Applied research
This would be targeted research with a specific practical application in view. For example, research towards developing a vaccine for a new virus.
Experimental development
This work is aimed at achieving technological advancements for creating new, or improving existing, materials, devices, products, or processes. For example, finding ways to scale up and optimize the production of a new vaccine.
Support work
Support work that directly contributes to the research activities above can also qualify, including engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research.
Taking the example of a new vaccine, if you were performing tests on a new process used to scale production, this would be considered support work for your experimental development.
What doesn't qualify?
This work falls outside the scope of SR&ED and does not qualify for consideration or claims:
- 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 or 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
- Style changes
- Routine data collection
The five questions
It can be tough to determine if your work qualifies for the SR&ED program. To make things clearer, there are five questions the CRA uses to determine whether a project is eligible for the SR&ED program.
- Was there a scientific or technological uncertainty?
Scientific or technological uncertainty means you're not sure if something can be done or how to do it based on what's already known. This applies to:
- Basic research: Trying to understand something new, where the outcome is unknown
- Applied research: Using science to solve a specific problem, but the solution isn't guaranteed
- Experimental development: Trying to build something new, but you're not sure if the technology exists to make it work
The SR&ED program is looking for work that is pushing boundaries and solving problems where the answer isn't obvious.
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
To qualify for SR&ED, you need to form a hypothesis designed to resolve the scientific or technological uncertainty.
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
To qualify for SR&ED, your project needs a clear plan to tackle the scientific or technological uncertainty. This plan should include:
- Goals: What are you trying to achieve?
- Testing: How will you test your ideas through experiments or analysis?
- Learning: How will you track your progress and adapt based on what you find?
SR&ED rewards companies that take a structured approach to solving problems and doesn’t just go after them with random trial and error. The program also expects the work to be done by qualified people with relevant experience in science, technology, or engineering.
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
SR&ED rewards companies that are truly innovating and expanding knowledge, not just making incremental changes.
You can make progress by:
- Discovering why something won’t work (eliminating bad ideas)
- Developing new knowledge or understanding, even if the project itself fails
Technological advancement is the key. It's about:
- Gaining a deeper understanding of technology beyond what's already known
- Creating something new or improved, but how you achieve it matters (not just the final product)
Simply making something new or better doesn't automatically qualify – there needs to be a deeper scientific or technological leap.
- Was a record of the hypotheses tested and the results kept as the work progressed?
The SR&ED program wants you to keep track of your work! This means:
- Recording your experiments, results, and why you did each step
- Tracking how each part of your project fits together and how it helps you reach your goals
- Keeping supporting documentation, such as project planning documents, source code, design documentation, test protocols, records of trial runs, and meeting minutes
Good record-keeping helps you explain your project and the progress you made, which is important for the SR&ED claim process.
Navigating SR&ED
Understanding the SR&ED program's intricacies might be daunting, but the potential rewards for your business are worth the effort. You could be looking at a significant tax credit that’ll fuel further innovation and growth – so you can keep the good ideas coming!
Whether you're in the early stages of exploring a groundbreaking idea or looking to refine an existing product or process, the SR&ED program offers a pathway to bring your visions to life, all while boosting Canada's position on the global stage of innovation.
Wrapping up
By familiarizing yourself with the eligibility criteria and application process of the SR&ED program, you can determine if your work qualifies.
This program can be a real game-changer, fuelling even more creative problem-solving and propelling your work toward success. Remember, innovation keeps Canada moving forward, and the SR&ED program is here to help businesses like yours thrive!
If you have any questions about the SR&ED program or would like to see if your work qualifies, reach out to kevin@humi.ca!
