The Scientific Research and Experimental Development (SR&ED or SRED) tax incentive program can reduce the taxable income of Canadian businesses and earn them investment tax credits.
SRED (SR&ED) represents one of the most significant sources of support that the Government of Canada offers to businesses of various sizes across different industries.
The definition of Scientific Research and Experimental Development is best described by this excerpt from the Income Tax Act:
…systematic investigation or search carried out in a field of science or technology by means of experiment or analysis… to advance scientific knowledge or to achieve technological advancement.
The SRED (SR&ED) program was launched in 2008. Thanks to it, the government is able to provide more than 3 billion dollars in refundable tax incentives annually to over 20,000 companies, three-quarters of which are small businesses.
Focus21 has extensive experience leveraging programs currently offered by the Government of Canada. We and our partners (CrossDynamix) consult with clients and explain how they can save money or find additional resources for their business’s digital transformation.
One of the most sought-after programs is Scientific Research and Experimental Development (SR&ED or SRED). It offers the opportunity to refund expenditures made on research and development (R&D), which can reduce taxable income and earn you investment tax credits.
From navigating eligibility applications to crafting tailored plans, we ensure a seamless process to reduce taxable income and earn investment tax credits through SRED (SR&ED). You can count on our expertise and accessible guidance every step of the way.
For SRED (SR&ED), any companies engaged in suitable activities within Canada are eligible. Moreover, eligibility does not depend on where the expenditures are geographically directed (suitable activities can occur even outside the country).
To justify a claim for SRED (SR&ED), it's crucial to collect all documents related to the SR&ED project. If your company's SR&ED claim is selected for further review, these documents will need to be presented.
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To encourage companies operating within the country to engage in R&D, the Government of Canada offers the opportunity for timely, consistent, and predictable financing.
The Canada Revenue Agency (CRA) aims to ensure that as many companies as possible are aware of the existence of the Scientific Research and Experimental Development program. The CRA guarantees that all applicants will receive the compensation they are legally entitled to through a transparent review process.
SRED (SR&ED) supports the financing of scientific and technological advancements that bolster a business's competitiveness, enabling more effective company development.
Thanks to SRED (SR&ED), it's possible to reduce tax liabilities in the current year, as well as carry forward expenses indefinitely, to decrease future tax liabilities.
With SRED (SR&ED), businesses are entitled to benefits in the form of refundable ITCs, tax reductions or both.
Eligible SRED (SR&ED) expenditures must fall into one of the following categories:
■ Basic Research — advancing scientific knowledge without a practical application in mind.
■ Applied Research — advancing scientific knowledge aimed at a specific practical application.
■ Experimental Development — achieving technological advancement to create new or improve existing materials, products, processes.
SRED (SR&ED) may also include other activities that support experimental developments, applied, or fundamental research in 8 areas:
■ Engineering,
■ Design,
■ Operations research,
■ Mathematical analysis,
■ Computer programming,
■ Payable data collection,
■ Testing, and
■ Psychological research.
It's important to note that the SRED (SR&ED) tax incentive is only available if any of these additional activities are necessary for conducting basic research, applied research, and experimental development.
Furthermore, a project does not have to be successful to qualify for the SRED (SR&ED) tax credit.
An SRED (SR&ED) claim is a great way to recoup a significant portion of spent funds. However, it's crucial to understand that the SRED (SR&ED) tax credit and other financing methods within this program cannot be used for a wide variety of work such as:
■ Market research,
■ Sales promotion,
■ Quality control,
■ Routine testing of materials, products, processes,
■ Research in the social sciences or humanities,
■ Mineral exploration (including oil or natural gas),
■ Commercial production, and
■ Regular data collection.
The above does not fall under the list of eligible SRED (SR&ED) expenditures, so you cannot reclaim your expenses in these cases.
To identify the portion of expenditures that can be reimbursed through the Scientific Research and Experimental Development program, either the traditional method (all SRED expenditures incurred during the year) or the proxy method (determining the amount of expenditures through a formula, rather than accounting for all expenditures) must be used.
Within the SRED (SR&ED) program, your company can claim a wide range of expenses, such as:
■ Salaries,
■ Materials,
■ Contracts,
■ Equipment rental costs,
■ Overhead, and
■ Third-party payments.
However, capital expenditures cannot be covered by SRED (SR&ED).
If your company's SRED (SR&ED) claim is selected for further review, these documents will need to be presented. Here are just a few examples:
■ Photographs and videos,
■ Accounting records,
■ Source code for software,
■ Project planning documents,
■ Experimental design plans,
■ Project documentation and drawings,
■ Laboratory notebooks,
■ Trial run records, and
■ Lease agreements.
To receive reimbursement under the Scientific Research and Experimental Development, it's important to apply within the prescribed deadlines:
■ Corporations — 17.5 months from tax years ending.
■ Individuals — 18 months from tax years ending.
If a company fails to report expenditures or projects using the prescribed forms and within the set deadlines, it will not be able to include the relevant amounts in its SRED (SR&ED) expenditure pool and will not be able to claim ITCs.
After submitting a Scientific Research and Experimental Development application to the CRA, the claim may be processed as submitted or may require further review.
In the first scenario, the process takes about 60 days, after which the company can receive a cheque.
In the second scenario, CRA representatives may contact the company for further clarification. In this case, it will take about 180 days to receive a cheque.
Companies utilizing Scientific Research and Experimental Development are inevitably audited by the CRA to ensure compliance with all tax legislation.
To expedite the process, it's best to contact CRA representatives for the most current information regarding Scientific Research and Experimental Development. It's also advisable to designate a contact person within your company who will be responsible for all correspondence.
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