What is SR&ED (Scientific Research and Experimental Development)?
SR&ED is Canada's primary tax incentive for research and development. CCPCs receive a 35% refundable investment tax credit on the first CAD 3 million of qualified SR&ED expenditures annually. Other corporations receive a 15% non-refundable credit. Qualifying work must resolve scientific or technological uncertainty through systematic investigation.
Current Rate (Corporate fiscal year)
35% refundable ITC for CCPCs on first CAD 3M of qualified expenditures. 15% non-refundable for other corporations.
Example
A CCPC spends CAD 500,000 on qualifying software R&D (salaries, materials, overhead via proxy). It claims a 35% SR&ED ITC of CAD 175,000. Because the credit is refundable, CRA pays the CAD 175,000 to the corporation even if it has no current-year tax owing. The CAD 500,000 expenditure is also deductible from income.
How SR&ED (Scientific Research and Experimental Development) works in Canada
The SR&ED programme is one of the most generous R&D incentive programmes among OECD countries. Understanding who qualifies, what expenditures count, and how to document claims is critical for technology businesses, manufacturers, and any business doing systematic technical work.
**Qualifying work**
SR&ED work must fall into one of three categories: basic research (to advance scientific knowledge without a specific practical application), applied research (to advance scientific knowledge for a specific practical application), or experimental development (work carried out to achieve technological advancement for the purpose of creating new or improving existing materials, devices, products, or processes). The defining feature is the presence of technological uncertainty (a problem that cannot be resolved by standard engineering or existing knowledge) and a systematic investigation to resolve it. Work that involves only routine engineering, routine data collection, or market research does not qualify.
**Eligible expenditures**
Qualified SR&ED expenditures include: wages and salaries of employees directly engaged in SR&ED, materials consumed or transformed in the SR&ED process, some overhead, and payments to arm's length subcontractors for SR&ED. There are two methods for claiming overhead: the traditional method (tracks actual overhead attributable to SR&ED) and the prescribed proxy amount method (PPA, which approximates overhead at 55% of wages). Most claimants use the PPA for simplicity.
**The ITC claim process**
SR&ED claims are filed using Form T661 (Scientific Research and Experimental Development Expenditures Claim), attached to the T2 return. The claim must be filed within 18 months after the end of the fiscal year in which the SR&ED was performed. This deadline is absolute: a late-filed SR&ED claim forfeits the ITC entirely. The CRA review process can take 12 to 24 months, and CRA may send a reviewer to discuss the technical content of the claim.
**Time tracking**
CRA requires contemporaneous documentation of SR&ED work: project descriptions, employee time sheets allocated to qualifying SR&ED activities, material purchase records, and experiment notes. Without proper documentation, claims are vulnerable to denial on audit. Best practice is to document SR&ED activities throughout the year, not to reconstruct records at filing time.
**Provincial SR&ED credits**
Most provinces have their own SR&ED tax credits that stack on top of the federal credit. For example, Ontario provides an Ontario Innovation Tax Credit (OITC) of 8-8% on qualifying expenditures, and an Ontario Research and Development Tax Credit (ORDTC) at 3.5%. These provincial credits make the combined effective incentive significantly higher than the federal rate alone.
Related terms
A Canadian-Controlled Private Corporation is a private corporation controlled by Canadian residents. CCPCs qualify for the 9% Small Business Deduction rate on active business income, the 35% refundable SR&ED investment tax credit, and the Lifetime Capital Gains Exemption on a qualifying share sale.
The T2 is the annual corporate income tax return filed with the Canada Revenue Agency by all Canadian resident corporations and certain non-resident corporations with a taxable presence in Canada. The return is due within 6 months of the corporation's fiscal year-end. The balance of corporate tax owing is due 2 months after year-end (3 months for eligible CCPCs).
A Business Number is a unique 9-digit identifier issued by the Canada Revenue Agency to identify a business or legal entity. The BN is the root identifier to which CRA program accounts are added: RC (corporation income tax), RT (GST/HST), RP (payroll deductions), and RM (import/export). All CRA business filings and remittances use the BN and program account suffix.
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