Scientific Research and Experimental Development (SR&ED) tax incentives

Back to Atlas

The Scientific Research and Experimental Development (SR&ED) tax incentives program is Canada's largest R&D program, designed to encourage research and development activities in the country.
What are the main aims and objectives?
The central objective of the SR&ED tax incentives program is to support and motivate Canadian companies to conduct research and development (R&D) within Canada. The overarching motivation behind this objective is to foster innovation, technological advancements, and economic growth. In particular, it sets out to achieve this by reducing the financial burden on businesses to invest in R&D by providing tax relief. This support is designed to enable companies to undertake more R&D projects, addressing scientific or technological uncertainties, and contributing to the overall development and competitiveness of the Canadian economy. 
How does the program work?

The SR&ED tax incentives program has two main components: 

  • The income tax deduction which allows immediate expensing of all allowable expenditures.  

  • The investment tax credit which is applied to income taxes otherwise payable. This may also be applied against income taxes payable in the current year, in a prior year, or may carried forward to a future year and in some cases the credit may be refundable 

The tax credits are available to companies of any size that invest in basic research, applied research, or experimental development. Eligible businesses can benefit from the program by deducting eligible expenditures. The general rate for the investment tax credit (ITC) under the SR&ED program is 15%, and this credit is non-refundable. However, Canadian-controlled private corporations (CCPCs) can claim an enhanced, fully refundable ITC of 35% on their first CAD $3 million of eligible expenditures. 

To be eligible for the Scientific Research and Experimental Development (SR&ED) tax incentives program, a project must meet the following criteria: 

  1. Technologically based: The project should aim to develop or improve products, processes, or materials, and involve technological challenges. 

  1. Technological uncertainty: The project must address a core technological issue, attempting to overcome uncertainty that cannot be easily resolved through standard practices or techniques. 

  1. Systematic approach: The project must follow a systematic approach, involving experimentation, testing, and analysis to address the technological uncertainty. 

  1. New technological advancement: The R&D work should lead to new knowledge, capabilities, or techniques that contribute to the advancement of technology. 

In general, current expenses that are eligible for the SR&ED tax incentives include salaries or wages of employees directly engaged in SR&ED; the cost of materials consumed or transformed in SR&ED and the lease costs relating to machinery and equipment used substantially for SR&ED; and certain expenses associated with contracts to perform SR&ED 

Additionally, foreign companies can indirectly apply for the Canadian SR&ED tax incentives by forming a Canadian subsidiary company to perform eligible R&D work. It's important to note that eligibility criteria may vary by provincial variants of the program. 

What is the overall cost?
The Scientific Research and Experimental Development (SR&ED) tax incentive program has an annual impact of around $3 billion on the Canadian government. 
How was it implemented?

The development of the Scientific Research and Experimental Development (SR&ED) tax incentives program can be traced back to the 1980s when the Canadian government recognized the need to encourage and support research and development (R&D) activities within the country. The program was created to stimulate technological innovation and promote economic growth. Over the years, the program has evolved and expanded, with improvements made to the eligibility criteria and the types of incentives offered. The SR&ED program is administered by both federal and provincial governments, making it the largest R&D support program in Canada.  

Over the years, the program has grown to accommodate businesses of various sizes and industries, with over 75% of the 18,000 claimants being small businesses. The SR&ED program has also seen changes in its eligibility criteria and the types of research activities it supports. Currently, the program supports experimental development, applied research, and basic research, but it does not cover marketing and sales, routine testing, or research in social sciences or humanities. The program's governance has evolved as well, with the Department of Finance and the Income Tax Act now overseeing the program. 

What impact has been measured?

An impact study conducted in 2007 revealed that the estimated net welfare gain per dollar of tax subsidy on the SR&ED program was 0.109 which represented a welfare gain of over $300 million per year.  

The Canadian government can also demonstrate that around 20,000 companies receive the tax credit each year allowing them to make savings of $3 billion.  

What lessons can be learned?

Some criticisms of the SR&ED tax incentives program include its complexity, subjectivity, and potential inefficiencies. The program's form T661 has been criticized for being too complex and needing streamlining. There is also concern about the subjectivity involved in determining the eligibility of R&D projects, which can lead to inconsistencies and disputes. Critics suggest that Canada should look to other countries, such as Australia, for more efficient and transparent self-assessment processes for R&D eligibility. 

Additionally it has been suggest that recent changes in the Eligibility of Work for SR&ED Investment Tax Credits Policy may have led to further confusion and concerns about the program's effectiveness. 

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom