Core Factors that Determine SR&ED Eligibility

If you’ve been looking for new ways to bolster your cash position and enhance your research and development (R&D) initiatives, The Scientific Research and Experimental Development (SR&ED) tax incentive program may be a valuable resource to look into. As Canada’s largest source of R&D-focused financial support, the SR&ED program helps thousands of businesses balance the challenges that come with pursuing innovative efforts by providing over $3 billion in tax credits annually.

In order to successfully file for SR&ED, it’s crucial for businesses to be aware of the criteria that determine eligibility for the program. Though the parameters for the program itself are quite extensive in their scope, failure to adequately explain (and, when necessary, defend) how your efforts adhere to the requirments of the SR&ED program may result in a reduction in expected credits and, in some cases, having your claim rejected. Below, we’ll take a quick look at the core factors that determine a filer’s eligibility for SR&ED, as well as why you should consider partnering with an SR&ED financing firm like Easly. Read on to learn more!

What is SR&ED

Before we go into the specifics of what is necessary to claim SR&ED credits, let’s take a quick look at the program itself. The roots of the SR&ED program go all the way back to the Income Tax Act of 1944, at which point companies could deduct an amount equivalent to 100% of current expenditures related to scientific research from their taxable income. While the modern standards for SR&ED have evolved significantly over time, the driving force behind the program is the acknowledgement that R&D is costly and frequently does not produce desired results, but nonetheless an essential part of innovation. The Government of Canada recognizes both the significant value that Canadian-driven innovation brings both domestically and abroad, as well as the challenges present when it comes to funding R&D efforts for continuous development. The SR&ED program is designed to alleviate some of the financial difficulty associated with R&D initiatives. For businesses qualifying for refundable SR&ED tax credits under the criteria of the program, the resultant refund received from filing can significantly extend runway and allow them to continuously refine efforts to generate more revenue down the line.

How to Qualify

In order to be eligible for SR&ED, your business will need to meet the set criteria as defined by the government. In addition to R&D efforts being required to be conducted within Canada, the following parameters must also be met:

Technological Advancement and Innovation

One of the components that determine whether or not you’re eligible for SR&ED credits is being able to prove that your project aims to advance or improve upon existing scientific or technological knowledge. You must be able to showcase how your business tackles uncertainties or challenges through systematic investigation or experimentation, going beyond routine engineering practices, as well as presenting clear objectives with regard to the creation of new products or services or the improvement of existing assets.

Scientific or Technological Based Content

The SR&ED program also requires that eligible projects feature a distinct element of scientific or technological content. In order to be eligible, involved activities must be grounded in scientific principles, with your work utilizing specialized expertise, technical skills, and professional knowledge in alignment with the parameters of the program. In particular, you must demonstrate that you have followed a structured and organized approach with your research and development activities. This should be demonstrated by maintaining a clear project plan with well-defined objectives, hypotheses, methodologies, and data collection processes.

Did you know: one of the most common causes of a denied SR&ED filing is poor documentation where observations, analyses, test results, and iterative improvements are concerned?

Canadian Based

As indicated above, the SR&ED program is exclusively available to projects that are based within Canada. Businesses filing for SR&ED must demonstrate that all eligible work was conducted in Canada and contributes to technological advancements within the Canadian economy. There is an allowance for Canadian employees who need to travel abroad in order to conduct some element of research for the SR&ED project. This type of work can only represent a maximum of 10% of the value of the entire claim.

A Word on Eligible Expenditures

While expenditures are not necessarily a “criteria”, they do play a key role in determining your eligibility. SR&ED is designed to provide incentives that mitigate the various expenses that come with pursuing R&D endeavours. Businesses must ensure that eligible expenditures, including salaries, cost of materials, subcontractor expenses, etc., are well-documented and directly linked to the objectives of your project.

Finance Your Refundable SR&ED Credits with Easly

Financing your credits with a trusted lender like Easly can help to alleviate the stress of waiting for your refund and bring balance to your cash flow today. SR&ED financing is a smart form of non-dilutive capital with no personal guarantees required. At Easly, we ensure you’re able to get your funding fast. With our underwriting team constantly reviewing applications, you can be funded within 10 days of applying.

Tap into your accrued SR&ED tax credits any time throughout the year with Easly Advances.

Learn more about the role SR&ED refund financing can play in your company’s growth by contacting Easly today.