The SR&ED landscape in Canada

Canada’s Scientific Research and Experimental Development (SR&ED) program offers tax incentives to over 20,000 organizations annually, totalling about $4.2 billion that help Canadian businesses fund their research and development projects.

If your company has not yet considered applying for SR&ED tax credits or if you have found the process challenging in the past, some potential changes to the program offer good reason to consider participation in this program.

SR&ED work entails a systematic investigation or search that is carried out in a field of science or technology through experiment or analysis including:

• Basic research: work undertaken to advance scientific knowledge without a specific practical application in view.
• Applied research: work undertaken to advance scientific knowledge with a specific practical application in view.
• Experimental development: work undertaken to achieve technological advancement, or create new or improve existing materials, devices, products or processes, including incremental improvements.

Canada’s productivity trails behind that of other countries, which helped spur the federal government to consult with Canadian companies in 2024 to enhancing the SR&ED program to encourage more innovation and productivity. The consultation is now in phase 2, which came with specific questions that hinted at changes being investigated by the Department of Finance to enhance the SR&ED program for Canadian businesses in one or more of these key areas:

1. Broadening access to refundable tax credits: to include Canadian public companies that have only earned credit towards tax owed, providing even more incentive for these companies to research and innovate.
2. Expanding eligibility definitions: to include innovation activities that are closer to commercialization than may have previously been allowed.
3. Introducing new incentives for Intellectual Property (IP) creation: revenues from IP that may or may not be derived from eligible SR&ED could be subject to more attractive income tax rates than traditional revenues.

82% believe SR&ED should be expanded to cover a broader range of activities and expenses, such as equipment and the commercialization of research, even if the program had a lower ITC

78% acknowledged that the R&D their business performs is currently not eligible for SR&ED

81% of leaders say they would conduct more R&D if the government introduced a patent box model, which would provide a lower corporate tax rate on revenues derived from Canadian IP

• Labour and overhead: including salaries and wages for employees performing qualified work.
• Contract payments: for qualified work performed at arm’s length on your behalf by companies within Canada.
• Materials: that were consumed or transformed as part of the SR&ED work, excluding capital.
• Third-party payments: to universities, colleges, research labs, etc., to conduct SR&ED on your behalf.

If your internal staff are underclaiming or being conservative on claims, or if this is your first SR&ED claim, do not wait until after the government implements these program enhancements. It’s important to get used to preparing these claims now including developing best practices, documentation, and record keeping approaches to support your claims.

That’s because SR&ED claims are filed retroactively with your tax returns – you are looking over activities you have already completed and seeing which could meet program requirements – so having good practices and approaches in place before you begin will help make the process easier and more efficient, compared with rushing to identify activities you may not be able to substantiate after the fact. You will gain valuable experience and knowledge to help ensure your SR&ED claims are supported and successful once the enhanced rules take effect.

You can start now by establishing effective processes, such as:

• Documenting what you’ve tested and trialed in the SR&ED space, along with the associated labour, materials, overhead, contracts and third-party payments expenses.
• Creating project charters that define each project’s objectives, technology risks, employee responsibilities, and implementation plan.
• Logging the time spent and costs you incurred so you can readily calculate and assess the size of claim and potential benefits.

Maximizing benefits: How uncovering eligible R&D related work hours led to nearly $60,000 in extra incentives for a software company

Labour costs are typically the largest component of a SR&ED claim, in most cases providing $1.55 of qualified expenditure for each dollar spent. That means accurately capturing all labour hours and their corresponding hourly rates is crucial for maximizing SR&ED benefits, particularly since the program operates on a self-assessment basis.

Recently, the KPMG Tax Incentives team reviewed the SR&ED claim for a software company. This company had been claiming their core dev team efforts, but was not considering directly supporting activities which were commensurate with the needs of their research and development.

Identifying an appropriate knowledge base level for eligible work in this field can be challenging due to the vast amount of open-source and publicly available knowledge, especially in rapidly evolving areas like machine learning and large language models.

KPMG’s experienced SR&ED professionals approach each claim with the knowledge and resources to help ensure clients are making the most of SR&ED tax credits. In this case, working with the software company, an extra 1,500 hours of research and development related work was found that helped the organization increase their benefits by nearly $60,000 – funds that could have been overlooked without the help of an experienced team.

Our SR&ED professionals can help you navigate the technical and financial eligibility requirements and ensure you have strong practices and processes to support your claim. We help ensure you’re not over or under claiming SR&ED tax credits – but that you claim and receive the right amount of incentives your organization deserves.

We can help explore your eligibility to receive SR&ED tax credits for your projects through:

1. Planning and scheduling to ensure you meet critical claim submission timelines and deadlines.
2. Analyzing R&D projects you conducted in the last tax year to determine which are eligible for tax incentives.
3. Review your prepared claims to identify those projects or costs which are missing that would yield a beneficial return.
4. Identifying expenditures and preparing qualified expenditure schedules for preparation of your corporate returns.
5. Drafting technical reports that outline each qualifying projects’ details in alignment with the prescribed format required by CRA.
6. Conducting a documentation review including technical and financial working papers to support your project position and auxiliary calculations.
7. Conducting financial or technical audits that support your claim’s review by the tax authority and the final approval of your investment tax credits.
   

Our teams can help your business successfully navigate Canada’s SR&ED tax incentive program and other government funding incentives – from understanding the SR&ED landscape and your place in it to maximizing the benefits your company is eligible to receive. Our professionals work with your organization to help prepare strong SR&ED claims that can unlock the full potential of this vital corporate tax incentives program – and we are here to support you every step along the way.

KPMG in Canada surveyed 534 Canadian companies between February 3 and February 27, 2024, using Sago's Methodify online research platform. All respondents are business owners or executive-level decision makers. Thirty-one per cent are leaders of companies with $500 million to $1 billion in annual gross revenue; 14 per cent, between $300 million to $499 million; 35 per cent, between $100 million and $299 million; 19 per cent, between $99 million to $10 million and the remaining one per cent, below $10 million. Seventy-five per cent of the companies are privately held and 25 per cent are publicly traded. Forty-two per cent are family-owned businesses.