What Is the SR&ED Tax Credit?
The Scientific Research and Experimental Development (SR&ED) tax credit is Canada's single largest tax incentive program for businesses conducting research and development. Administered by the Canada Revenue Agency (CRA), SR&ED provides both a tax deduction and an investment tax credit (ITC) to corporations, individuals, trusts, and partnerships performing eligible R&D work in Canada. Canadian-controlled private corporations (CCPCs) can claim the enhanced 35% refundable rate on the first $3 million of qualified SR&ED expenditures, while all other eligible claimants receive the basic 15% rate. When stacked with provincial R&D tax credits available in provinces like Ontario, Quebec, Alberta, and British Columbia, the combined benefit can reach up to 68% of eligible R&D costs. Over $3 billion in SR&ED tax credits are claimed each year, making it an essential funding source for technology companies, manufacturers, and any business pushing the boundaries of science and engineering in Canada.
Federal vs. Provincial SR&ED Rates
Combined federal and provincial R&D tax credit rates across Canada
| Province | Provincial R&D Credit | Federal (CCPC Enhanced) | Combined Maximum Rate |
|---|---|---|---|
| Quebec | Up to 30% (SMEs) | 35% | ~65% |
| Ontario | Up to 8% (OITC) | 35% | ~43% |
| British Columbia | Up to 17.5% (IDMTC) | 35% | ~52.5% |
| Alberta | Up to 20% (IEG) | 35% | ~55% |
| Manitoba | Up to 20% | 35% | ~55% |
| New Brunswick | Up to 15% | 35% | ~50% |
| Nova Scotia | Up to 15% | 35% | ~50% |
| Saskatchewan | Up to 10% | 35% | ~45% |
| All Provinces (Basic) | Varies | 15% | 15% + Provincial |
Note: Actual combined rates vary based on company size, CCPC status, and specific provincial program eligibility. Quebec SMEs can achieve the highest combined rates through the provincial R&D super-deduction.
Who Qualifies for SR&ED Tax Credits?
The SR&ED program is one of Canada's most broadly accessible incentive programs. Unlike many grants that target specific industries, SR&ED is available to any business performing eligible R&D work in Canada, regardless of size or sector.
Eligible Claimants
Corporations (including CCPCs and public companies), individuals, trusts, and partnerships conducting eligible R&D work in Canada. Both Canadian-owned and foreign-owned businesses operating in Canada qualify.
Eligible Work
Work must involve a systematic investigation in a field of science or technology through experiment or analysis. It must address technological uncertainty that cannot be resolved through standard practice and seek a technological advancement.
All Industries Qualify
Technology, manufacturing, agriculture, healthcare, energy, construction, food processing, aerospace, automotive, mining, and any other sector. If your work involves resolving a technical challenge through R&D, you may qualify.
Startups & Pre-Revenue
CCPCs with no revenue or taxable income still qualify for refundable SR&ED credits at the enhanced 35% rate, receiving a direct cash refund from CRA. This makes SR&ED critical funding for early-stage companies.
Three Tests for Eligible SR&ED Work
The CRA uses three criteria to determine whether work qualifies as SR&ED:
- Technological Uncertainty: Was there a scientific or technological uncertainty that could not be resolved by standard procedures or by routine engineering? This is the most important test. You must demonstrate that the solution was not readily available using existing knowledge.
- Technological Advancement: Did the work aim to achieve a technological advancement, meaning new knowledge or capability beyond what was previously known? Incremental improvements count if they address a genuine technical challenge.
- Systematic Investigation: Was the work conducted through a systematic investigation using qualified personnel, through experiment, analysis, or a combination of both? You need to show a methodical approach to resolving the uncertainty.
Common Examples of Eligible SR&ED Work
- Developing a new software algorithm to solve a problem where no known solution exists
- Designing a manufacturing process that overcomes material or engineering constraints
- Creating a new medical device that requires experimental prototyping and testing
- Improving energy efficiency in industrial equipment beyond current state-of-the-art
- Developing new formulations in food science, agriculture, or pharmaceuticals
- Engineering novel mechanical systems that require iterative testing to achieve performance targets
- Building AI or machine learning models where the approach and results are uncertain
How to Claim SR&ED Tax Credits
Filing an SR&ED claim involves technical documentation, expenditure tracking, and filing specific CRA forms with your annual income tax return. Here is a step-by-step guide to preparing a successful claim.
Identify Eligible R&D Projects
Review your business activities throughout the fiscal year to identify projects involving technological uncertainty. Look for work where your team attempted to solve problems that couldn't be resolved with existing knowledge or standard practice. Both successful and unsuccessful projects can qualify, as long as the work involved genuine experimentation.
Document Your Work Throughout the Year
Maintain contemporaneous records (records created at the time the work was done, not after the fact). This includes project plans, lab notebooks, test results, design iterations, meeting minutes, code commits, and records of hypotheses tested. Documentation must demonstrate the technological uncertainties you faced and your systematic approach to resolving them. CRA reviewers rely heavily on this evidence.
Track Eligible Expenditures
Separate and track all SR&ED-eligible costs: employee salaries and wages for time directly spent on R&D, materials consumed or transformed during experiments, subcontractor fees (80% of payments to arm's-length contractors are eligible), and overhead costs. Use timesheets to allocate employee time between SR&ED and non-SR&ED activities. Choose between the traditional method (claiming actual overhead) or the proxy method (55% of labour costs as a simplified overhead calculation).
Prepare Form T661 and Technical Descriptions
Complete CRA Form T661 (Description of Scientific Research and Experimental Development Claim) with detailed technical narratives for each project. Describe the technological advancement sought, the uncertainties encountered, and the systematic investigation conducted. Use clear, technical language. Avoid marketing language or business justifications. The descriptions should read like an engineering or science report, not a business plan.
Calculate Your Investment Tax Credit
Use Schedule T2SCH31 (for corporations) or Form T2038(IND) (for individuals) to calculate your investment tax credit. Apply the 35% enhanced rate for CCPCs on the first $3 million of qualified expenditures, or the 15% basic rate for all other claimants and for CCPC expenditures exceeding the $3 million threshold. Factor in any provincial R&D credits you're eligible for, which are claimed separately on provincial returns.
File With Your Income Tax Return
Submit your completed SR&ED claim with your annual income tax return. You have up to 18 months after your fiscal year-end to file. After submission, the CRA may conduct a financial review, a technical review, or both. Respond promptly and thoroughly to any requests for additional documentation or site visits. Average processing time is 60-120 days for straightforward claims, though complex reviews can take longer.
What Expenses Can You Claim?
Understanding which expenditures are eligible is critical for maximizing your SR&ED claim. The CRA allows several categories of expenses, but each has specific rules and limitations.
Salaries and Wages
This is typically the largest component of an SR&ED claim. You can claim the salary or wages of employees who directly performed, supervised, or directly supported eligible SR&ED work. Only the portion of time spent on eligible activities is claimable. Accurate timesheets are essential for supporting your allocation.
Materials Consumed or Transformed
Materials, supplies, and raw materials that are consumed or transformed during the R&D process are eligible. This includes prototyping materials, chemicals used in experiments, and components used in testing. Materials that are incorporated into a product for sale or that can be reused are generally not eligible.
Subcontractor Costs
Payments to arm's-length subcontractors for SR&ED work are eligible at 80% of the invoiced amount. For non-arm's-length parties, the eligible amount is based on the actual expenditure incurred by the subcontractor. Ensure subcontractors provide sufficient documentation about the work performed.
Overhead and Other Expenditures
Businesses can choose between two methods for claiming overhead. The proxy method allows you to claim 55% of your eligible salary base as a substitute for actual overhead costs, simplifying record-keeping. The traditional method requires tracking actual overhead costs (utilities, rent, equipment depreciation) directly attributable to SR&ED work. Most small and medium businesses use the proxy method for its simplicity.
What Cannot Be Claimed
- Capital expenditures (equipment purchases, since 2014)
- Market research, sales promotion, or quality control for commercial production
- Social sciences or humanities research
- Commercial production using known processes
- Style changes or cosmetic modifications with no technical challenge
- Prospecting, exploring, or drilling for minerals, petroleum, or natural gas
SR&ED & R&D Tax Credit Programs
Federal and provincial tax credit programs for Canadian businesses conducting research and development
Canada's premier R&D tax incentive program. Provides an investment tax credit of up to 35% (enhanced rate for CCPCs) on eligible R&D expenditures including salaries, materials, and subcontractor costs. Combined with provincial credits, businesses can recover up to 68% of their R&D investment. Over $3 billion claimed annually by thousands of Canadian businesses across all sectors.
Non-repayable funding for SMEs conducting R&D and innovation activities. IRAP complements SR&ED by providing upfront grant funding (rather than after-the-fact tax credits). Businesses can receive both IRAP funding and SR&ED credits on different portions of the same project, though eligible expenditures cannot be double-claimed.
Refundable tax credit for eligible R&D expenditures incurred in Ontario by qualifying corporations. Stacks on top of the federal SR&ED credit to increase your combined return. Applied to the same eligible expenditure base as SR&ED, providing additional recovery on salaries, materials, and overhead for R&D performed in Ontario.
One of Canada's most generous provincial R&D credits. Quebec offers a base rate of 14% on eligible R&D expenditures, with enhanced rates for SMEs that can significantly increase the total benefit. When combined with the federal 35% CCPC rate, Quebec businesses achieve some of the highest R&D recovery rates in Canada.
Supports companies that create jobs in innovation-focused industries in Alberta through a tax credit on incremental R&D expenditures. One of the most generous provincial R&D incentives in Western Canada. Stacks with federal SR&ED for combined rates of up to 55% for qualifying CCPCs.
Refundable tax credit for eligible interactive digital media activities conducted in B.C. Covers development of video games, educational software, and interactive content. Stacks with federal SR&ED when the digital media work also qualifies as R&D, providing combined credits of over 50% for eligible BC companies.
Supports large-scale R&D and innovation projects across Canada. While not a tax credit, SIF provides direct grant and loan funding for major research initiatives, technology commercialization, and industrial transformation. Complements SR&ED for companies undertaking transformative R&D projects.
Co-funds collaborative R&D projects in advanced manufacturing, including automation, AI, robotics, and new materials. NGen projects often generate significant SR&ED-eligible expenditures, allowing businesses to stack supercluster funding with tax credits on different cost components of the same project.
SR&ED vs. IRAP: Understanding the Difference
Two of Canada's most important R&D funding programs are often confused. While both support innovation, they work very differently and can often be used together.
| Feature | SR&ED Tax Credit | IRAP Grant |
|---|---|---|
| Type | Tax credit (after-the-fact refund) | Non-repayable grant (upfront funding) |
| Maximum Amount | No cap (35% of eligible costs for CCPCs) | Up to $1 million per project |
| When You Receive Funds | After fiscal year-end (60-120 days post-filing) | During the project (milestone payments) |
| Eligibility | Any business conducting R&D in Canada | SMEs with 500 or fewer employees |
| Application Process | Filed with annual tax return | Proposal to NRC Industrial Technology Advisor |
| Can They Stack? | Yes — on different eligible costs within the same project. Expenditures funded by IRAP are deducted from SR&ED-eligible amounts. | |
For a detailed comparison including application strategies and how to maximize both programs, see our IRAP vs. SR&ED Comparison Guide.
Frequently Asked Questions About SR&ED
The federal SR&ED investment tax credit has two rates. The enhanced rate of 35% is available to Canadian-controlled private corporations (CCPCs) on the first $3 million of qualified SR&ED expenditures per year. This credit is fully refundable, meaning CCPCs receive a cash refund even if they owe no tax. The basic rate of 15% applies to all other eligible claimants (public companies, foreign-owned companies, and CCPC expenditures above $3 million). Provincial R&D credits add an additional 8% to 30% depending on the province, bringing combined rates as high as 68%.
Corporations, individuals, trusts, and partnerships that conduct eligible scientific research or experimental development work in Canada can claim SR&ED tax incentives. The work must involve a systematic investigation or search carried out in a field of science or technology through experiment or analysis. It must address technological uncertainty that cannot be resolved through standard practice and seek a technological advancement. Both Canadian-controlled private corporations (CCPCs) and non-CCPCs qualify, though CCPCs receive significantly higher rates and refundable credits.
Eligible SR&ED expenditures include salaries and wages for employees directly engaged in R&D, materials consumed or transformed in the research process, contractor fees (80% of arm's-length payments), and overhead costs. Capital expenditures (equipment purchases) are no longer eligible as of 2014. Businesses can choose either the traditional method (claiming actual overhead) or the proxy method (claiming 55% of eligible salary costs as a simplified overhead calculation). The proxy method is popular for its simpler documentation requirements.
SR&ED claims are filed with your annual income tax return using Form T661 (Description of Work) and Schedule T2SCH31 (for corporations) or Form T2038(IND) (for individuals) to calculate the investment tax credit. Claims must be filed within 18 months of the fiscal year-end. Many businesses engage specialized SR&ED consultants to prepare claims because the technical descriptions require specific language about technological uncertainty, systematic investigation, and technological advancement. A well-prepared claim significantly reduces the risk of CRA review adjustments.
Yes, and this is one of the most valuable aspects of the SR&ED program. Canadian-controlled private corporations (CCPCs) are eligible for refundable tax credits at the enhanced 35% rate, meaning you receive a direct cash payment from CRA even if your company has zero revenue and owes no tax. For pre-revenue technology startups, SR&ED can provide critical funding to sustain R&D operations. Many Canadian tech startups rely on annual SR&ED refunds as a core component of their funding strategy alongside venture capital and angel investment.
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SR&ED claims require detailed technical writing and precise expenditure tracking. Professional SR&ED consultants can maximize your claim value and reduce the risk of CRA review adjustments.
SR&ED consultants typically work on a contingency basis (15-30% of the refund received)