The Canadian Scientific Research and Experimental Development Tax Incentive Program (SRED or SR&ED) provides support in the form of tax credits and/or refunds, to corporations, partnerships or individuals who conduct scientific research or experimental development in Canada.
Background
Industrial tax incentives in Canada have been in place since at least 1944. A 1989 report prepared by Odette Madore, Govt of Canada Economics Division, summarizes the history of R&D tax policy. 1944-1986 - traditional tax deductions for R&D, introduced R&D tax credits, 1987-1993 - mitigated abuses and simplified administration 1994–present - clarified definition of experimental development, broadened eligibility re Qualified Small Businesses, allowed proxy calculation for overhead, conducted major review in 1998, simplified forms, conducted major review in 2010 Oct 2011 The Canadian government commissioned an expert panel to conduct a comprehensive Review of Federal Support to Research and Development.
The SR&ED program is intended to encourage businesses of all sizes, particularly small to medium and start-up firms, to conduct research and development (R&D) that will lead to new, improved, or technologically advanced products, processes, devices, and materials. The Canadian SR&ED tax incentive is the government's largest single support program for R&D. Canada has one of the more generous R&D programs among OECD countries.
"Each year the SR&ED program provides over $4 billion in investment tax credits (ITCs) to over 18,000 claimants. Of these, about 75% are small businesses." (CRA RC4472) An expert panel appointed by the federal government recently recommended that the federal government consider redirecting some of the funds allocated to the SR&ED program to ensure that enough supports exist for larger businesses interested in taking innovations to the global market place. The SR&ED program produces less of an incentive as firms grow, since the maximum benefit any single firm can receive from the program is fixed, and not proportional to firm size.
SR&ED expenditures are deducted as business expenses, and may also qualify for investment tax credits that are received in the form of a reduction in income taxes payable, cash refunds, or both. Qualifying expenditures may include wages, expenditures for materials, equipment leases and overhead that are directly related to R&D, and 80% of the cost of eligible work by contractors. Capital equipment and equipment lease expenditures made after 1 January 2014, are not eligible. The following activities constitute SR&ED: Experimental development - technological advancement Applied research - advancement of knowledge for a practical purpose Basic research - advancement of knowledge for its own sake Eligible support work: engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research
The following activities are not eligible for the SR&ED program: marketing & sales, routine testing, research in social sciences or humanities, commercial production, style changes, routine data collection, petroleum or natural gas exploration/drilling.
In order to claim such expenditures, an assessment on scientific or technological eligibility of the claimed activities needs to be performed, according to three criteria: