Are SR&ED Refunds Taxable? A Deep Dive into SR&ED Tax Implications

The Scientific Research and Experimental Development (SR&ED) program is a highly beneficial program for Canadian businesses engaged in research and development activities. SR&ED provides valuable financial incentives in the form of tax credits, which can be used to offset the high cost of innovative efforts. By reducing at least some of the financial burden of research and development, SR&ED allows businesses to allocate more resources towards growth, exploration, and fostering competition.

A common question when considering filing an SR&ED claim is whether or not your refund is taxable. Below, we’ll take a closer look at the tax implications of SR&ED refunds, as well as the benefit of working with an SR&ED financing provider like Easly. Read on to learn more.

Understanding SR&ED Refunds

Before we discuss whether or not your refund is taxable, it’s important to understand the basics of what SR&ED refunds are and how they work. SR&ED refunds are provided to companies that earn refundable SR&ED tax credits. These investment tax credits are calculated based on eligible expenditures incurred by the company during R&D activities. Depending on the characteristics of the company, they may earn non-refundable SR&ED credits instead, which can be used to write down income taxes owing.

Get a more comprehensive overview of how the SR&ED program works here.

Are SR&ED Refunds Taxable?

In short, yes. When SR&ED credits are applied/refunded, that reduces the size of the available SR&ED pool the following year, essentially making this year’s refund taxable income next year. This defers the tax bill, giving R&D-focused efforts a chance to recoup funds in the interim.

Key Considerations for SR&ED Refunds

With this in mind, there are some important considerations to be aware of when claiming SR&ED credits. These factors include:

Documentation

Proper record-keeping is a must when claiming SR&ED credits. Documentation of eligible expenditures and R&D activities is necessary to support your claims and ensure compliance with tax regulations. Documentation will also help to reduce the stress and overall time frame of an SR&ED audit, which businesses should anticipate occurring at some point when filing over multiple years.

Claiming Eligible Expenses

To benefit from SR&ED incentives, businesses must ensure that the expenses they claim as part of their R&D activities meet the program’s eligibility criteria. This includes costs related to wages, subcontractors, materials, and overhead directly associated with the project.

Utilizing Professional Consultants

While some businesses opt to self-file their SR&ED claims, most find it beneficial to partner with a consultancy that specializes in SR&ED. Consultants know the ins and outs of the program intimately and are able to use that to your advantage when filing to ensure you get the maximum benefit while staying compliant with tax regulations.

Finance Your SR&ED Credits with Easly

SR&ED refunds can take weeks or even months to arrive once your claim is accepted by the CRA. Not to mention, they can only be claimed once a year, which means you need to wait more than a year to be reimbursed for expenditures incurred at the beginning of your fiscal year. This does not align with the cash flow needs of a growing company.

By partnering with Easly, your organization can tap into its earned refundable SR&ED credits today rather than waiting for the CRA. At Easly, we provide non-dilutive capital on a schedule that suits your company’s needs. You can use our Easly Cash Flow Calculator to determine how much funding you are eligible for from our team.

Contact Easly today to get started on financing your SR&ED credits!