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What is SR&ED: Innovation tax credits, explained

July 10, 2023

Canadian startups consistently rank among the most innovative in the world, thanks in no small part to Canada’s amazing homegrown talent, as well as tax policies at both the federal and provincial levels that support  innovation. 

Perhaps the highest-profile (and often most valuable—especially for growth-stage startups) funding program on offer is the Canada Revenue Agency’s (CRA’s) Scientific Research & Experimental Development (SR&ED) tax credit.

SR&ED—often referred to as just ‘SHRED’—is a federal tax incentive program that gives Canadian businesses of all sizes (and across sectors) access to both refundable and non-refundable tax credits to help cover the costs of research and development (R&D).

To qualify for SR&ED—which is the largest single source of government funding for industrial R&D offered in Canada—organizations must aim to either create new or meaningfully improve existing products, processes, principles, methodologies or materials. 

From there, claimants can recover up to 64 percent of qualifying expenditures. These include:

  • Wages for workers directly involved in SR&ED-eligible work
  • Subcontractor costs for SR&ED-eligible work
  • Material costs required to achieve technological advancement

The benefits of SR&ED are plentiful but the application process and criteria can be hard to navigate for first-timers. Read on to learn if SR&ED is right for your startup and how Volta and our Power Crew partner Boast AI can help you with SR&ED.

What are the SR&ED qualifying criteria?

For projects to be considered “SR&ED eligible,” activities must meet the following thresholds:

Technological Advancement

To meet this standard, the project must generate information that advances understanding of the underlying technologies. In a business context, this means that when new or improved material, device, product or process is created, it must embody a technological advancement in order to be eligible. Put simply, the work must attempt to increase the technology base or level from where it was at the beginning of the project.

Technological Uncertainty

A project must also directly address technological obstacles (or uncertainties) that cannot be overcome by applying the techniques, procedures and data that are generally accessible to competent professionals in the field. Put simply, if there is already a technique that accomplishes the stated task, new processes for accomplishing the same goal wouldn’t qualify for SR&ED. 

Technical Content

Claimants must provide proof that a systematic investigation was executed. This entails going from identification and articulation of the scientific or technological obstacles to hypothesis formulation, through testing by experimentation or analysis, to the statement of logical conclusions. In a business context, this requires that the objectives of the work must be clearly stated at an early stage in the project’s evolution, and the method of experimentation or analysis must be clearly set out.

Learn more about the Technology Readiness Levels used to commonly gauge R&D maturity (and, often in lock step with SR&ED eligibility) on Boast’s blog. 

Examples of SR&ED projects

With all that said, the TL;DR of SR&ED can be summed up as follows: to qualify, projects must advance the understanding of new concepts or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation guided by qualified personnel. This might include:

  • experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
  • applied research to advance scientific knowledge with a specific practical application in view;
  • basic research to advance scientific knowledge without a specific practical application in view; and
  • support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, but only if the work is commensurate with, and directly supports, the eligible experimental development, or applied or basic research.

How to apply for SR&ED—and defend your application

The SR&ED application process can be extremely complicated, as just filling out the necessary paperwork alone calls for teams to provide a wealth of data related to payroll, engineering and project management systems that don’t always work in tandem. 

To that end, the SR&ED application calls for a working knowledge of both the business side of R&D as well as the engineering language that individuals deeply involved in the development process may struggle to elevate for a non-technical audience.

The CRA wants insight into all aspects of a given project, from day-to-day expenditures to any issues that come up along the way, which can take weeks (or even months) to compile without a dedicated SR&ED consultant. 

By partnering with Boast AI, customers can automatically sync all data relevant to the project’s scope into a single platform, making sure it’s properly organized and documented to align with SR&ED requirements. Boast AI also takes on the responsibility of your project’s eligibility for the program, lending more credibility to a claim in the eyes of the CRA because dedicated tax experts were involved.

SR&ED is hardly the only program offered in Canada to help drive innovation. In fact, there are even more programs (and methods for stacking) encompassing both tax credits and grants that can play a huge role in arming startups with non-dilutive capital to fuel their R&D.

To learn more about all of these programs, download Boast AI’s Guide to Non-Dilutive Funding in Canada.

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