The SR&ED Tax Incentive program is the largest R&D program supported by the Government of Canada. Sometimes known as Shred, SR&ED is directly responsible for supporting all sorts of Canadian businesses doing research and development in Canada.
The SR&ED tax credit is applied to R&D projects that meet the criteria outlined in the Scientific Research and Experimental Development program. The incentives are applied either as a deduction against income or utilized as an investment tax credit (ITC) that is non-refundable or refundable, depending on how it is used. Every year, more than 16,000 applicants qualify, and over $3 billion in tax incentives are passed out annually to businesses of all shapes and sizes.
Let’s learn about what the SR&ED tax credit is and how Shred credits work.
SR&ED tax credit application
Any corporation, individual, trust, or partnership may apply for SR&ED program incentives. How you are classified will determine the terms of what’s refundable and granted under the program.
Yes, foreign-controlled corporations can apply for the SR&ED tax credit. However, there is a strict criterion on how this works. The R&D under SR&ED must be completed in Canada and within certain criteria to be accepted.
However, SR&ED does not cover non-Canadian workers. The work conducted must be done in Canada and by eligible Canadian employees. They must be a Canadian tax resident. As long as their taxes are paid in Canada, foreign workers in Canada on worker visas or who have permanent residency status are eligible like any other Canadian.
How much is the SRED tax credit refund?
ITCs issued by the SR&ED program amount to 15-35% of qualified SR&ED expenditures. If you’re granted excess ITCs for the current year, it is possible to use them to get a refund. If you have unused ITCs, they can be carried back to a maximum of three years or forward to a maximum of twenty years and applied against tax payable in the year identified. There is no maximum cap on the amount.
Canadian-controlled private corporations or CCPCs can earn a refundable ITC at 35% on qualified expenditures up to the maximum expenditure limit of $3 million. This is a limit applied yearly. Above the $3 million amount, you start to earn non-refundable ITCs at a rate of 15%. If a CCPC fulfills the definition of a qualifying corporation, at that 15% mark, they can be refunded 40% of the 15% amount. This is what the SR&ED expenditure limit means and how it works for Canadian corporations.
The end goal of the SR&ED tax credit is to reduce the tax obligations of the applicants. The incentives rewarded are used to counteract the expenses accumulated for R&D. Parties who receive SR&ED tax credits can also hold onto them, pool deductible SR&ED expenditures, and use them in a future year to reduce net income for tax purposes at a later date. Ultimately, it’s up to the applicant how they wish to use the credit.
Several expenses can be included when calculating SR&ED tax credits, including salaries and wages paid directly to employees and subcontractors, materials, overhead, and additional subcontracting fees.
To have your R&D project qualify under SR&ED, it must fall into one of three categories. Most projects will fall under experimental development or the attempt to achieve advancement in technology. Your work may fall under applied research or the attempt to advance scientific knowledge with a specific and practical application identified.
There is also basic research, classified as the advancement of scientific knowledge but without an application in mind.
SRED filing deadline
The SR&ED tax credit is claimed when you are filing your tax return. SR&ED filings must be done no later than twelve (12) months after the end of your fiscal year or eighteen (18) months following the tax year in which the R&D expenditures were claimed. After this time limit has expired, an applicant forfeits the right to apply for an SR&ED tax credit on the specific expenditures.
After an SR&ED claim is submitted, your claim is processed by the CRA and will end up in one of three predicaments.
- Refundable claims are denied and processed within 60 calendar days of being received.
- Refundable claims are accepted as filed and processed within 60 calendar days of being received.
- Refundable claims are selected for review, to be completed within 180 calendar days following the date of receipt.
However, these wait times are sometimes extended when there are unexpected delays or if claims are submitted later than six (6) months after the fiscal year-end.