What is SR&ED And Why Does it Exist?

What is SR&ED and how does it help Canadian businesses.

If you’re a business in Canada involved in R&D (Research and Development) work, you’re most likely acquainted with the Scientific Research and Experimental Development (SR&ED) Program. What is SR&ED? In brief, SR&ED is a tax incentive program delivered by the Canada Revenue Agency (CRA), that provides support to businesses conducting scientific research or experimental development in Canada. A clear and concise large-picture view of the program on the CRA’s website encapsulates its purpose:

“The Scientific Research and Experimental Development (SR&ED) Program uses tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada. These tax incentives come in three forms: an income tax deduction, an investment tax credit (ITC), and, in certain circumstances, a refund.”

CRA website

How Can SR&ED Help My Business?

Suppose you’re doing routine research and development of a product. A small issue that you expected to be an easy fix turns out to be not-so-simple. Your usual strategies to solve similar problems are not working. None of the experts you consult nor the literature you read offer you any answers. To solve the issue yourself, you need to conduct studies, experiments, tests, prototyping and more. Rising costs coupled with the uncertainty of a positive outcome causes you (or your managers/shareholders) to shelve the work.

In situations such as these, the Scientific Research and Experimental Development Tax Incentive Program can help you carry on. While the tax incentive is retroactive, and therefore is only evaluated after the work is complete, the potential for a significant tax credit for this type of uncertain and boundary-pushing work can shift the scales back towards continuing to experiment. The best part? You don’t need to have finished your R&D to be eligible for SR&ED. Learning how something doesn’t work can be an advancement worth rewarding too.

Why Does SR&ED Exist?

As a for-profit venture, you may have chosen to limit your risk, especially in terms of development, for financial reasons. For the economy, encouraging this risk is vital to increase growth.  With tax credits, governments are in a unique position to lend a significant, meaningful hand to businesses. After all, no country want their industries to be entirely dependent on other economies by outsourcing technological advancements and innovation. Once again, the CRA sums it up succinctly:

“SR&ED tax incentives not only help claimants, it also betters society by encouraging innovation, technological advancements, and the pursuit of scientific and technological knowledge, discoveries and ideas that may lead to Canadian economic growth and competitiveness.”

Business Assistance Programs Are A Universal Phenomenon 

SR&ED is just one of several federal programs around the world assisting businesses conducting R&D. Recent Organisation for Economic Co-operation and Development (OECD) reports listed about 40 countries running similar programs. These included the USA, UK, France, Romania, Israel, China, South Africa, Argentina, and Australia. While national policies and goals determine the form and scope of these programs, the ultimate aim is always to boost innovation and productivity. 

Do SR&ED Programs Work?

Economists and policy makers find it difficult to fully and fairly assess the impact of these various programs. However, a 2020 OECD microBeRD project report listed a few notable positive takeaways. 

  • It found public intervention in general to be an effective incentive for private business R&D. To quote, “One monetary unit (EUR) of either tax or direct support translates into around 1.4 units of business R&D.
  • It specifically notes that R&D tax incentives “increase the level of R&D activity among existing R&D performers and entice firms to start or continue investing in R&D.

Apart from numbers, the CRA’s website highlights multiple success stories that attest to the effectiveness of the program.

SR&ED in Canada

Canada is generally recorded as having one of the more generous government support programs for business R&D among OECD countries. There’s no reason why entrepreneurs should not be looking into SR&ED as an incentive to keep innovating. 

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