What Is the SR&ED Tax Credit?

What SR&ED is

SR&ED is a federal tax incentive administered by the Canada Revenue Agency (CRA). It is meant to encourage businesses of every size and sector to do research and development in Canada. Instead of applying for a grant before the work starts, you do the work, keep records, and claim the SR&ED tax credit after your fiscal year ends, alongside your corporate tax return.

The program is not limited to labs or large technology firms. A software company working through an architecture problem, a manufacturer testing a new fabrication process, or a construction business experimenting with a new building method may all have eligible work. The test is the nature of the work, not the industry or whether the project succeeded.

What kind of work qualifies?

CRA looks at whether the work was a systematic investigation aimed at resolving a technological uncertainty. In practice, a project is usually assessed against a few questions:

• Was there a technological uncertainty? Was there a technical problem that couldn't be solved using standard practice or knowledge readily available to a competent professional in the field?
• Did you follow a systematic investigation? Did the team form hypotheses, test them through experiments or analysis, and adjust based on the results?
• Was there a technological advancement? Did the work generate new knowledge, even if the final product never shipped?
• Was it documented? Were there records made as the work happened, such as test results, design iterations, commit histories or meeting notes?

Some activities don't qualify on their own, including routine testing, quality control, market research, style changes and commercial production. Support work such as engineering, programming or data collection can qualify when it directly supports eligible R&D.

What can be claimed?

Eligible SR&ED expenditures generally fall into a few categories:

• Salaries and wages of employees directly doing or supervising the eligible work
• Materials consumed or transformed during the work
• Contracts for SR&ED performed on your behalf in Canada (subject to rules about arm's-length contractors)
• Overhead, either itemized or calculated using CRA's proxy method
• Capital property used for SR&ED, which recent federal changes have made eligible again for property acquired on or after December 16, 2024

The credit rate depends on the type of corporation and the size of its claim. Canadian-controlled private corporations can earn an enhanced, refundable credit on qualifying spending up to an annual expenditure limit. Other corporations, or spending above the limit, generally earn a lower credit that is non-refundable. The federal government recently expanded the program, and those changes are now law. Because limits and rates change, check CRA's current SR&ED pages before relying on a specific figure.

How SR&ED works with Alberta's Innovation Employment Grant

Alberta corporations that perform qualifying R&D may also be eligible for Alberta's Innovation Employment Grant (IEG). The IEG is generally based on the same qualifying R&D expenditures as federal SR&ED, so the two are typically prepared together. A well-documented SR&ED claim usually forms the foundation for an IEG claim. We cover how the two programs interact in a separate article, SR&ED and Alberta's Innovation Employment Grant: How They Work Together.

How and when to claim

SR&ED is claimed with your corporate income tax return. A claim generally includes:

• Form T661, which describes each project and the eligible expenditures
• Schedule 31, which calculates the investment tax credit
• Supporting records kept during the year, which CRA may ask to see

There is a firm deadline. A claim must generally be filed within 18 months after the end of the tax year in which the expenditures were incurred. A late claim is usually lost, so it's worth thinking about SR&ED at your corporate year-end rather than afterward.

Common mistakes

• Waiting until year-end to gather evidence. Documentation created as work happens is far more persuasive than a description written months later.
• Claiming routine work. Bug fixes, standard implementation and routine testing usually don't qualify on their own.
• Treating SR&ED separately from your tax return. SR&ED interacts with your corporate tax position, instalments and planning, so it works best when prepared alongside year-end.
• Assuming a failed project can't qualify. If the work was a genuine attempt to resolve a technical uncertainty, a failed outcome can still be eligible.

Common questions

This article is general information only and is not tax or accounting advice for your specific situation. Program rules, rates and limits change; refer to the Canada Revenue Agency's SR&ED program pages for current details.