SR&ED Policies, Summarized
It can be overwhelming visiting the CRA SR&ED Program policies website, where the information is sorted alphabetically and it’s often unclear which policies are “must reads” for technical vs. financial individuals. As this might seem daunting to someone first entering the world of SR&ED, we’ve created short summaries for each part of the CRA policies page, to help users quickly find the information they require.
Italicized text indicates a direct quotation from CRA SR&ED policy.
- Technical Eligibility Policies
- Eligible Expenditure Policies
- General Financial Policies
- Proxy & Traditional Method – Associated Policies
- CRA Internal Application Policies
- Complex & Rarely Used Financial Policies
- Policies No Longer Relevant
Technical Eligibility Policies
Eligibility of Work for SR&ED Investment Tax Credits Policy
Scientific research and experimental development (SR&ED) is “a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.” There are three distinct categories of SR&ED: basic research, applied research, and experimental development. This policy helps companies determine if their work or part of their work is eligible for SR&ED investment tax credits. It provides the definition according to the income tax act, detailed descriptions, and examples of what is considered SR&ED, what is not considered SR&ED, and what is considered support work.
Read this policy if you require clarification of what work constitutes SR&ED.
Since some of the terms that appear in the SR&ED policies are unfamiliar to the average person, the Canadian Revenue Agency (CRA) provides a glossary. The SR&ED glossary is provided to clarify some of the terms used on the SR&ED Web pages, policies, forms, and guides. To help users navigate the unfamiliar terms of the SR&ED policies, each unfamiliar term is linked to its definition for easy access. The definitions also provide links to various SR&ED policies to direct users towards more information about a particular definition.
Use this glossary if you come across an unfamiliar word or phrase that may be specific to the SR&ED language.
SR&ED while Developing an Asset Policy
This document defines policy in the case of SR&ED work during the development of a new asset. “An asset can be a material, device, product, or process facility.” Because of the nature of asset development, the need for SR&ED work may arise. When such work does arise, allowable SR&ED expenditures incurred for the development of an asset–salary or wages, materials consumed or transformed, SR&ED contracts, overhead, and other expenditures–retain their nature. The work must first be proven to be SR&ED work. “The development and / or use of an asset can involve SR&ED work, a mixture of SR&ED and commercial work, or only commercial work.”
Read this policy if you are developing an asset and want to know if it is eligible for SR&ED.
SR&ED During Production Runs Policy
This document defines policy in the case of experimental development (ED) occurring during the operation of equipment or processes in a production or manufacturing environment. This occurs when the operation is part of the systematic investigation or search by experiment or analysis—for example, when experiments are carried out during production runs. Specifically, this document looks at how to determine allowable SR&ED expenditures when they are incurred in conjunction with the operation of a commercial facility. The principles and methodology described in this document do not apply when there is no experimental development during the production, even if the production output will be used in SR&ED.
Read this policy if during the operation of equipment or processes in a production or manufacturing environment you believe some or all of the work may be eligible for SR&ED tax incentives.
Eligible Expenditure Policies
SR&ED Salary or Wages Policy
Salary and wages can be included in the SR&ED expenditures if they are directly related to the SR&ED work. Salary includes benefits, as wells as vacation pay, statutory holiday pay, sick leave pay, pay in lieu of termination notice, bonuses, tips and gratuities, honorariums, director’s fees, management fees, and commissions. This document’s purpose is to explain what may be included in salary or wages for SR&ED purposes and to highlight the differences between directly undertaking, supervising, or supporting salary or wages under the directly attributable rules when using the traditional method and directly engaged salary or wages when using the proxy method.
Read this policy if you are trying to determine how much of your employees’ salaries can be included as SR&ED expenditures.
Materials for SR&ED Policy
“The cost of materials consumed or transformed in the prosecution of SR&ED in Canada is an SR&ED expenditure under both the traditional method and the proxy method for determining SR&ED expenditures.” The cost of materials can be claimed in two situations: when materials are consumed or transformed in the prosecution of SR&ED. “To claim the cost of a material, the expenditure must be an expenditure of a current nature. Generally, expenditures such as for the purchase of equipment, data, or a software license, are not expenditures of a current nature. They are rather expenditures of a capital nature.”
Read this policy if you are trying to determine how much of your materials can be claimed as SR&ED expenditures or need to know an exact definition of materials “transformed” or “consumed”.
Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy
Claimants have the choice of performing the SR&ED in-house, having someone else perform SR&ED on their behalf, or make payments to certain approved entities to be used for SR&ED. “This document will focus on the second point: having someone else perform SR&ED on their behalf. Where a claimant contracts another party to have SR&ED performed on their behalf, the amount payable under the contract may be an allowable SR&ED expenditure and 80% (100% prior to 2013) of the expenditure would be allowable as a qualified SR&ED expenditure of the claimant for investment tax credit (ITC) purposes.”
Consequently, the party performing the work would be allowed to claim SR&ED expenditures in respect of the contract, but would have to reduce its qualified SR&ED expenditures for ITC purposes by payments received under the contract to ensure no ITCs are duplicated.
Read this policy if you hired someone else to perform SR&ED work on your behalf and need to know how to calculate your ITCs.
Third-Party Payments Policy
A third-party payment is generally a payment made to an entity to be used for SR&ED carried on in Canada, that is related to the claimant’s business, where the claimant is entitled to exploit the results of the SR&ED. This document gives an overview of the types of entities to which third-party payment can be made; explains the criteria to be met for a payment to each type of entity may be considered eligible; highlights the considerations to be made when making payments to research chairs; highlights the differences between third-party payments and contract expenditures for SR&ED performed on behalf of the claimant; outlines the process and criteria for certain entities to become “approved”; and informs agricultural organizations and agricultural producers about available SR&ED investment tax credits.
Read this policy if you are making or receiving a third-party payment and need to know how it will affect your SR&ED investment tax credits.
Assistance and Contract Payments Policy
Because the intent of the SR&ED legislation is to provide tax incentives to businesses on the net costs of performing SR&ED in Canada, assistance will reduce the pool of deductible SR&ED expenditures if it is in respect of an expenditure that was claimed for SR&ED.
This document goes over government assistance, non-government assistance, and contract payments. These are recognized for tax purposes in the tax year where the claimant has “received, is entitled to receive or can reasonably be expected to receive” the assistance or contract payment. This is generally consistent with recognition of amounts on an accrual basis. As a general rule, claimants are required to use the accrual method of accounting.
Read this policy if you received assistance in paying for your SR&ED work as it may reduce your pool of deductible SR&ED expenditures.
General Financial Policies
SR&ED Filing Requirements Policy
The SR&ED program provides two tax incentives:
- SR&ED expenditures can be claimed as part of the pool of deductible SR&ED expenditures to reduce income for tax purposes in the current tax year or carried forward to reduce income of future tax years;
- a taxpayer can receive SR&ED investment tax credits (ITCs) on qualified SR&ED expenditures in the form of a cash refund, a reduction of tax payable, or both depending on the circumstances. Unused SR&ED ITCs may be carried back or carried forward. For more information on ITC, please refer to the SR&ED Investment Tax Credit Policy.
To make an SR&ED claim for these tax incentives, however, certain filing requirements must be met. This document helps claimants determine which forms to fill out and how to fill out such forms.
Read this policy if you are unsure of which forms to fill out or need help in filling out specific forms.
Pool of Deductible SR&ED Expenditures Policy
This document explains how a taxpayer carrying on a business in Canada may deduct, in calculating income from the business for the year, expenditures of a current and expenditures of a capital nature for SR&ED. It shows which expenditures will cause a decrease in the pool and which will cause an increase. This document also explains the major change made to the expenditure policy as part of the 2012 Federal Budget, which states that capital expenditures incurred on or after 2014 will no longer qualify for income tax credits.
Read this policy if you are calculating your pool of deductible SR&ED expenditures and need to understand what expenditures decrease or increase your pool. Also read this if you need to understand the major changes announced in the 2012 budget regarding capital expenditures.
Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy
Total qualified SR&ED expenditures for ITC purposes represent the amount that is used to calculate a claimant’s ITC for SR&ED for a particular tax year. This policy document helps determine the total qualified SR&ED expenditures for investment tax credit (ITC) and helps calculate the SR&ED expenditures from qualified expenditures pool. The document explains what may be included and what must be excluded on Form T661 in terms of SR&ED expenditures. It also explains how the legislation for SR&ED ITCs under the Act relates to the calculating of total qualified SR&ED expenditures.
Read this policy if you need assistance in calculating your total qualified SR&ED expenditures, including the calculated total from the qualified expenditures pool.
SR&ED Investment Tax Credit Policy
This policy document deals with determining investment tax credits (ITCs) within the context of the Scientific Research and Experimental Development (SR&ED) Program. “An ITC may be earned in respect of various investments or expenditures. An ITC may be earned in the year by a corporation, individual, member (partner) of a partnership, or beneficiary of a trust, on qualified SR&ED expenditures.” Generally, SR&ED ITC is earned at a basic rate of 15% for tax years that end after 2013 or 20% for tax years that end before 2014; the document is changed to reflect this new policy.
Read this policy if you are calculating your ITCs for the income tax year or need an explanation of the basic rate change made in 2014.
Proxy & Traditional Method – Associated Policies
Prescribed Proxy Amount Policy
The prescribed proxy amount (PPA) is only determined under the proxy method for calculating SR&ED expenditures. This policy helps claimants decide when and when not to use the prescribed proxy amount. Claimants have two ways to calculate their SR&ED expenditures. They can elect to use the proxy method or the traditional method. “Claimants that elect to use the proxy method to determine their expenditures on, or in respect of, SR&ED cannot treat any portion of SR&ED overhead and other expenditures as qualified SR&ED expenditures because these expenses are not one of the three (six, prior to 2014) specific types of expenditures that may be included in the pool of deductible SR&ED expenditures.” When using the PPA a predetermined estimate for your expenditures is used to calculate your pool of expenditures.
Read this policy if you are calculating your SR&ED expenditures using the proxy method as you will be forced to use the PPA when calculating your expenditures.
Traditional and Proxy Methods Policy
The Income Tax Act provides two methods for calculating expenditure additions to a pool of deductible SR&ED expenditures—the traditional method and the proxy method. This document reviews how to calculate for each method and the difference between each one. The amount that will be included in a pool of deductible SR&ED can vary depending on whether someone elects to use the traditional or proxy method. “After a claim has been filed, the method of determining the SR&ED expenditures cannot be changed.”
The main difference between the proxy and traditional method is the claiming of overhead expenditures. Using the traditional method claimants can list each necessary item, whereas, with the proxy method the overhead expenditure is calculated.
Read this policy if you are deciding between using the traditional or proxy method for calculating expenditures. You can use this policy to determine which may be most beneficial for you.
SR&ED Overhead and Other Expenditures Policy
“SR&ED overhead and other expenditures can only be claimed under the traditional method when calculating SR&ED expenditures.” More information on the traditional method can be found in the Traditional and Proxy Methods Policy.
“When using the traditional method, overhead and other expenditures are entered on line 360 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. This line is also used to enter the portion of salary or wages of employees who directly undertake, supervise, or support the performance of SR&ED, but who are not directly engaged in SR&ED.”
“When a claimant elects to use the proxy method to calculate SR&ED expenditures, overhead and other expenditures are not included in the pool of deductible SR&ED expenditures or in the calculation of qualified SR&EDexpendituresfor investment tax credit (ITC) purposes. Instead, the proxy method involves calculating a notional amount for overhead and other expenditures called the prescribed proxy amount (PPA). The PPA is not included in the pool of deductible SR&ED expenditures, and it cannot be deducted when calculating income for tax purposes. However, an ITC is earned on the PPA since it forms part of the qualified SR&ED expenditures.”
Read this policy if you are using the traditional method to calculate your expenditures and you need to know how to calculate and fill out the appropriate forms.
CRA Internal Application Policies
Application policy: Conflict of Interest with Regard to Outside Consultants
A consultant that works for both taxpayers and the Department, specifically on work related to SR&ED tax credits, is in a conflict of interest situation. Consultants shall not be employed in situations that create a conflict of interest or a perception of a conflict of interest.
“Because of the commercially sensitive nature of the information provided by taxpayers in their SR&ED claims, no person having any past or existing conflict of interest should have access to this information.”
Read this policy if you believe you are working under a conflict of interest or suspect someone else to being working with you under a conflict of interest.
Application Policy: Penalties under Subsection 163(2)
This application policy addresses what happens when there is an overstated claim or claims on an SR&ED application. As described in this document, the department may take action on such cases that could be construed as tax evasion. The purpose of this document is to specify when the department will take such actions against what they determine to be unlawful representation. “The amount of this penalty will be calculated in accordance with paragraphs 163(2)(a) and 163(2.1)(b) of the Act. Penalties in respect of the understatement of income can be applied to both refundable and non-refundable SR&ED claims.”
Read this policy if you have mistakenly overstated a claim and need to know what actions will be taken against your claim.
Complex & Rarely Used Financial Policies
SR&ED Claims for Partnerships Policy
This document specifically deals with SR&ED expenditures incurred by a partnership and the allocation of SR&ED investment tax credits (ITCs) to members of a partnership. “This document does not deal with ITCs earned on qualified property, apprenticeship expenditures, or child care expenditures. Furthermore, the determination of an interest in a partnership, the calculation of the adjusted cost base of an interest in a partnership, and the calculation of the net income of a partnership are beyond the scope of this document.”
Read this policy if you are filing SR&ED claim as a partnership and need to know how to allocate ITCs between the two parties of interest.
Recapture of SR&ED Investment Tax Credit Policy
“At the outset of an SR&ED project, a performer may not know whether the materials used in the project will be consumed or transformed, or whether the project will result in a product that has some value to the performer or someone else. Also, a claimant may intend to use a piece of equipment in SR&ED throughout its useful life, but later change its use or dispose of it. The recapture rules are intended to make sure that only the net costs of performing SR&ED attract SR&ED tax incentives. Since it is not always possible to determine net costs at the outset of a project, the recapture rules will reverse all or a portion of the SR&ED investment tax credit (ITC) earned by adding an amount to a claimant’s tax payable for the year in which the sale or conversion to commercial use of an SR&ED property takes place.
Expenditures of a capital nature no longer qualify for SR&ED tax incentives after 2013. The recapture rules contained herein continue to apply to SR&ED capital expenditures and shared-use-equipment that generated an SR&ED ITC.”
Read this policy if some of your materials were consumed or transformed or you are changing the use or dispose of equipment before the end of its useful life. You may be the subject of an SR&ED recapture.
Policies No Longer Relevant
SR&ED Capital Expenditures Policy
“The purpose of this document is to:
- explain that capital expenditures made after December 31, 2013 no longer qualify for SR&ED tax incentives;
- explain expenditures of a current nature after 2013;
- explain that capital expenditures made before 2014 may be claimed for SR&ED purposes;
- provide guidelines for determining the intent of a claimant that acquired capital property for the prosecution of SR&ED carried on in Canada (SR&ED capital property) before 2014;
- explain the nature of SR&ED capital property as depreciable property; and
- identify issues surrounding the sale of SR&ED capital property.”
As mentioned above, the 2012 federal budget announced that expenditures of a capital nature made after 2013 will no longer qualify for SR&ED tax incentives. This includes capital expenditures made before 2014 for property that became available for use after 2013. “Further, for SR&ED purposes, expenditures of a current nature made after 2013 exclude expenditures for capital property or the right to use capital property.”
The distinction between a current and a capital expenditure has become more significant now that capital expenditures no longer qualify for any SR&ED tax incentives.
Read this policy if you are trying to determine what expenditures you can claim and which are no longer eligible. This is another useful policy if you are trying to decipher how the new changes will affect you and your claim.
SR&ED Lease Expenditures Policy
“The purpose of this document is to:
- explain which expenditures made before 2014 may be claimed for the leasing of equipment used in SR&ED;
- explain the differences in claiming lease expenditures under the traditional and proxy methods; and
- identify issues surrounding the lease of SR&ED equipment.”
“This policy document deals with lease expenditures incurred by a claimant before 2014 that are for the prosecution of SR&ED carried on in Canada.” This document is to be used to understand how leases made before 2014 may be calculated as expenditures, explain the differences in claiming lease expenditures under the traditional and proxy methods; and identify issues surrounding the lease of SR&ED equipment.
Read this policy if you have leased equipment before 2014 and need to determine whether it could qualify as an expenditure of a capital nature
“An SR&ED capital expenditure is new capital property that is intended to be used during all or substantially all (ASA) of its operating time in its expected useful life for the prosecution of SR&ED carried on in Canada, or where ASA of its value is intended to be consumed in such prosecution, and may qualify for an investment tax credit (ITC).”
This document also helps users navigate the various changes that happened in this field. For example, the aforementioned change to capital expenditures made in 2014 and what the rules were prior to 1992.
Read this policy if you have equipment (acquired before 2014 and after 1992) and need to learn if it qualifies as a capital expenditure or need help determining its intended use vs. actual use.