ca/ Canadian Scientific Research and Experimental Development Tax Credits
To ensure that Canada remains competitive in the global marketplace, the Government of Canada has developed a program that offers tax incentives to encourage Canadian businesses to conduct Scientific Research and Experimental Development (SR & ED) in Canada. The SR & ED program is administered by the Canada Revenue Agency (CRA) and the incentives are Investment Tax Credits that are either refundable (even if your company is not taxable) or non-refundable. Manitoba, Saskatchewan, and British Columbia have parallel programs that are also administered by CRA. This means that your company could receive a cash refund for the year in which you filed a claim, or a tax credit that can be carried back for three years or carried forward for twenty years (ten years until 2006) that can be applied against taxes owing or paid. Take a moment to consider the following:
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Are you developing a new product or process? Are you improving an existing product or process? Are you developing or improving a material? Are you developing prototype equipment? Are you developing custom machinery or equipment?

If your company is involved in any of the above activities, you may qualify for SR & ED tax credits. The program requires that a company put its dollars at risk; in other words, a company designs a research project, spends its own money to undertake the research, and then claims the tax credits. The Canada Revenue Agency (CRA) will review the claim from two different perspectives: Technical and financial.


What you may consider to be research and development (R & D) may be somewhat different from the type of work that is eligible for federal and provincial tax incentives. Qualifying research activities for the tax credits are based upon the definition of SR & ED as stated in the Income Tax Act. The Income Tax Act defines SR & ED to be a systematic investigation or search carried out in a field of science or technology by means of experimentation or analysis. To satisfy this definition, there are three criteria that must be met. These criteria are as follows:
1. There must be a scientific or technological advancement sought. The work you do must

generate information that advances the understanding (knowledge) of scientific relations or technologies. In effect, you are seeking to increase your company's technology database – a departure from standard practice. 2. There must be scientific or technological uncertainty. On the basis of generally available knowledge, you are uncertain as to whether a given result or objective can be achieved. Alternatively, you may be fairly confident the objective can be achieved, but uncertain as to which of several possible alternatives (paths, routes, approaches, equipment configurations, system architectures, circuit techniques, etc.) will work. 3. There must be scientific or technical content. The work must involve a systematic investigation utilizing experimentation or analysis (e.g. iterative in nature). The work should be carried out by qualified personnel and should be adequately documented.

The Income Tax Act is very specific on what types of expenditures are allowed for conducting SR & ED. These expenditures must be directly attributable to the prosecution of SR & ED, and the SR & ED must be done in Canada. Some examples of expenditures that may be directly related to SR & ED activities are as follows:
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Salary or wages Materials consumed in the SR & ED process Subcontractors Leases of equipment Third-party payments Overheads Capital equipment

In many instances, it is extremely difficult to determine the allowable overhead amounts for SR & ED purposes. However, the Income Tax Act allows for an alternative method of claiming overhead (called the proxy amount). This is also true for equipment used in SR & ED that is also used for commercial production. The Income Tax Act does allow for partial tax credits. If you would like more information, we invite you to contact us,


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