SR&ED Tax Credits - The federal and many of the provincial governments provide business incentives by means of the taxation system to companies and individuals that conduct scientific research and experimental development (SR&ED) in Canada. These incentives take the form of tax credits, and accelerated or additional tax deductions for expenditures made on SR&ED.

What is SR&ED? It is defined as the activities including the basic research, applied research and experimental development. Experimental development is defined to be work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes. The work does not need to be revolutionary and work that is eligible includes improvements to existing technology. A key part of assessing whether a project is an SR&ED project is whether it was undertaken for the purpose of achieving technological advance. A technological advance is generally understood to be the discovery of technical knowledge that advances their understanding of scientific relations or technologies. The requirement for a discovery implies that there is an unknown or uncertainty of a technological nature at the beginning of a project which will be resolved through the systematic investigation process.

The Government's View: SR&ED is defined in the Income Tax Act and defined " A systematic investigation or search carried out in a field of science or technology by means of experiment or analysis". A systematic search would normally encompass a process by which a hypothesis is formulated or a technological objective is set, a methodology is devised for testing whether the technological objective is met, the tests are performed, the results are observed, and conclusions are drawn. Systematic searches are often performed by skilled individuals who wear the white coats, but also can be performed by individuals in overalls on a shop floor. The qualification of the individuals to do the work, and the systematic search itself is often referred to as the technological content of a project.SR&ED expenditures are deductible as a regular business expense, and also may generate substantial tax credits. These tax credits range from 20% to 50% of the expenditure. Often these credits are refundable even if no taxes have been paid, and can offer a critical source of funding for many companies.

SR&ED activities are also defined to include support work or linked activities undertaken by or on behalf of a taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs and directly in support of core scientific research and experimental development activities.

Activities not included in the definition of SR&ED: Activities such as market research, sales promotion, quality control, routine testing, social science or humanities research, prospecting for natural resources, style changes, routine data collection and commercial production activities.