The Scientific Research and Experimental Development (SR&ED) Tax Incentive Program or SR&ED is one of the most important sources of government funding for a high-tech startup company. SR&ED is filed with your tax return, and gives you a cash “refund” even if you owe no taxes. SR&ED is retro-active, so you don't apply for it in advance. Instead, at the end of the tax year, you determine how much of your salary and other costs were used for “qualifying work”, and you can get back from CRA some percentage of that as a cheque the next year. Since the money is a tax credit, it's guaranteed to be paid by CRA. There's no question of some fund running out of money for that year – if you qualify, you will get the cash on a prompt basis.
You might see it written as SRED and pronounced as “shred”.
What kind of work is eligible?
If your company performed work that is either (a) scientific research or (b) experimental development, you should qualify. Experimental development means that you are trying to build something where there's a significant amount of certainty about whether you can actually succeed. For example, if you are doing something that no one has ever done before, or never done in that specific way before. The more uncertainty involved, the better you qualify. SR&ED expects to see substantial documentation that shows all of the blind alleys and problems you encounter. They don't require that you actually produced a working product, just that you tried.
How much do you get back?
You can only claim salaries and expenses that fall under the eligible categories. You must have actually paid out those amounts (no double-dipping). The amount you can claim seems to vary from accountant to accountant, but generally range from 1/2 to 2/3 of the amount you spent.
The maximum claim is $2 million for any one company (needs verification).
How do you file?
Filing for SR&ED involves gathering records and writing descriptions of your work, and it's not necessarily obvious how to do it right. The government has particular standards for what they want to see and someone with experience will know how to frame their technical “narrative” so that it includes what the SR&ED examiners are interested in and excludes things that they are not (for example, they have no interest in the business reasons of why you did what you did).
You should keep records, notebooks, emails, status reports, etc. from the time you were working, as these will be critical for preparing a narrative a year later, and also in case SR&ED decides to review or audit your claim, in order to prove that you really did what you claim you did.
Many or most companies hire SR&ED experts, who often work for or with an accounting company. SR&ED experts can write your whole claim for you, or help you write it. Obviously the expense can vary, and it's worth asking around who other people use. There are a lot of individuals out there who will offer to do it for a fee or a percentage of the payout.
Links
- Official web site: http://www.cra-arc.gc.ca/sred/
