SR&ED Tax Credit: Scientific Research & Experimental Development (2025 Guide)
The Scientific Research & Experimental Development (SR&ED) program is Canada's most valuable federal tax incentive for innovation and R&D. Whether you are a startup, a scale-up tech firm, a manufacturer, or a growing SME, SR&ED can put real cash back into your business—often covering up to 60% of eligible salaries and costs when combined with provincial programs. This comprehensive guide covers SR&ED eligibility, the claim process, deadlines, documentation, stacking with provincial innovation credits, and advanced tips to maximize your refund.
What is SR&ED?
- SR&ED is a federal tax incentive program that encourages Canadian companies to invest in scientific research and experimental development within Canada.
- Available to incorporated businesses (CCPCs and others), partnerships, and (to a lesser extent) unincorporated businesses.
- Offers refundable and non-refundable tax credits for eligible salaries, materials, third-party contracts, and overhead.
- Administered by the Canada Revenue Agency (CRA). Provincial R&D credits can be claimed in addition to SR&ED (see below).
- Both profit and loss-making companies can claim; refundable credits mean you get cash back even with no tax owing.
Who is Eligible for SR&ED?
- Canadian-Controlled Private Corporations (CCPCs): Eligible for the 35% refundable federal credit on the first $3 million of qualified expenditures (and 15% on amounts above that, non-refundable).
- Other corporations and partnerships: May claim the 15% non-refundable federal credit.
- Eligible Work Includes:
- Experimental development to resolve technological uncertainty (e.g., developing new or improved products, processes, software, or materials).
- Applied or basic scientific research.
- Support work: engineering, design, data collection, programming, testing, and analysis related to SR&ED projects.
- Who Can't Claim? Routine quality control/testing, market research, commercial production, or cosmetic changes. Work must advance scientific/technological knowledge and involve a systematic investigation.
Tip: Many tech/software, manufacturing, cleantech, and even food/ag innovation projects are eligible—especially if you are solving technical challenges or engineering something new.
Which Expenditures Qualify for SR&ED?
- Salaries & Wages: Payroll for employees directly engaged in eligible SR&ED work (including developers, engineers, scientists, technical managers, and support staff).
- Materials: Supplies consumed or transformed in the course of eligible R&D.
- Third-Party Contracts: Payments to contractors or consultants for eligible SR&ED activities performed in Canada.
- Overhead: Calculated using either the traditional method (actual overheads) or the proxy method (a flat 55% of eligible salaries for CCPCs, covering rent, utilities, admin, etc.). Most claimants use the proxy method.
- Leased Equipment (in some cases): If used directly in SR&ED activities.
- Capital Expenditures: Not eligible since 2014 (except for some pre-2014 claims).
- Non-Eligible: Sales/marketing, non-R&D admin, patenting costs, and work performed outside Canada.
Documentation is critical: Keep detailed timesheets, project plans, technical reports, payroll, and invoices to support your claim.
How to Claim: Step-by-Step SR&ED Process
- Identify eligible projects: Review all development, engineering, or research work for technical uncertainty or innovation. Document the problem, steps taken, and outcomes.
- Track expenditures: Keep timesheets for employees, invoices for contractors, and receipts for materials used in SR&ED.
- Prepare Form T661: Complete the SR&ED Expenditures Claim, including technical descriptions (project narratives) for each project—focus on the advancement, uncertainty, and systematic investigation.
- Prepare supporting schedules: Include Schedule T2SCH31 (Investment Tax Credit – Corporations) and, if applicable, provincial innovation credit forms.
- File with your corporate tax return (T2): Submit electronically or by mail within 18 months of your fiscal year-end (the absolute deadline; earlier is better for cash flow).
- Maintain all records: CRA may audit your claim and request proof of eligible work, expenditures, and technical details. Claims are often reviewed for first-timers and large claims.
Many companies use SR&ED consultants, but you can file your own claim. Large consultant fees (as much as 20–30% of your refund) are not required—tax software and CRA guides are available.
Deadlines & Timelines
- 18-Month Deadline: You must file your SR&ED claim within 18 months of your company’s fiscal year-end. Late claims are absolutely denied.
- CRA Review: Most claims are processed within 60–120 days, but complex or large claims may be selected for review/audit, which can add several months.
- Refunds: Refundable credits are paid as cash (not just tax reduction) for loss-making companies.
Tip: Don’t wait until the last minute. Start preparing your technical and financial documentation during the year.
Stacking: Combine SR&ED with Provincial R&D Credits
- Most provinces offer their own R&D or innovation credits—fully stackable with federal SR&ED. These can add 10–40% more refund on top of your federal claim.
- Key provincial programs:
- Always coordinate claims: Provincial credits may have slightly different eligibility or documentation rules. Learn more about maximizing startup & innovation incentives.
Real-World Claim Scenarios
1. Tech Startup (Ontario)
ABC Tech Inc. (CCPC, 8 employees) develops a new AI-based SaaS platform. Over the year, they spend:
Federal refund: 35% x $285,000 = $99,750 (refundable)
Ontario Innovation Tax Credit: 10% x $285,000 = $28,500 (refundable)
Ontario ORDTC: 3.5% x $285,000 = $9,975 (non-refundable)
Total refund: $138,225
ABC Tech Inc. (CCPC, 8 employees) develops a new AI-based SaaS platform. Over the year, they spend:
- $300,000 on developer/engineer salaries (75% eligible SR&ED time)
- $40,000 on eligible contractor costs
- $20,000 on materials, cloud computing, and overhead (proxy method)
Federal refund: 35% x $285,000 = $99,750 (refundable)
Ontario Innovation Tax Credit: 10% x $285,000 = $28,500 (refundable)
Ontario ORDTC: 3.5% x $285,000 = $9,975 (non-refundable)
Total refund: $138,225
2. Manufacturing SME (Manitoba)
Federal refund: 35% x $210,000 = $73,500
Manitoba R&D Credit: 15% x $210,000 = $31,500 (partially refundable)
Total refund: $105,000
- $200,000 on process engineers and technical staff for new equipment development
- $25,000 on prototype materials
- $15,000 on eligible third-party testing
Federal refund: 35% x $210,000 = $73,500
Manitoba R&D Credit: 15% x $210,000 = $31,500 (partially refundable)
Total refund: $105,000
3. SaaS SME (BC, loss-making)
Federal refund: 35% x $165,000 = $57,750
BC Innovation Credit: 10% x $165,000 = $16,500 (refundable)
Total refund: $74,250 (paid as cash even with no profit)
- $150,000 on in-house developer salaries
- $60,000 on cloud computing, materials, and proxy overhead
Federal refund: 35% x $165,000 = $57,750
BC Innovation Credit: 10% x $165,000 = $16,500 (refundable)
Total refund: $74,250 (paid as cash even with no profit)
Common Pitfalls & Audit Risks
- Poor Documentation: Most denied or reduced claims are due to lack of technical or financial backup. Keep contemporaneous notes, project plans, and timesheets.
- Claiming Routine Work: SR&ED is only for work that advances knowledge—routine bug-fixing, upgrades, or minor changes may not qualify.
- Late Claims: File within 18 months of year-end. Late claims are absolutely denied.
- Double-Counting with Provincial Credits: Ensure expenses are not claimed twice or on ineligible activities.
- Using Unapproved Consultants: Some third-party consultants charge high contingency fees and offer little audit defense. Use reputable advisors or file in-house.
- Under-Claiming: Many companies under-claim by missing eligible projects, especially in software or process improvement. Review all technical undertakings—even failed ones.
Frequently Asked Questions: SR&ED Tax Credit
Who can claim the 35% refundable SR&ED credit?
Only Canadian-Controlled Private Corporations (CCPCs) are eligible for the 35% refundable credit, up to $3 million in eligible expenditures. Non-CCPCs and large corporations receive only the 15% non-refundable credit.
Is work performed outside Canada eligible?
No. Only SR&ED activities performed within Canada qualify. Work performed abroad is ineligible, even if paid by a Canadian company.
Can I claim for failed projects or unsuccessful R&D?
Yes! SR&ED encourages risk-taking—projects that fail or result in dead ends are eligible, as long as you can document the systematic investigation and technological uncertainty.
What is the "proxy method" for overhead?
The proxy method allows you to claim a flat 55% of eligible SR&ED salaries as overhead, simplifying record keeping and often increasing the claim. Most CCPCs use the proxy method.
How long do I need to keep records for SR&ED claims?
At least 6 years from the end of the tax year in which the claim is made. CRA may audit claims within this period and will request technical and financial backup.
Related Innovation & Startup Credit Guides
- Canada-Wide Business Tax Credits – National directory of all key business credits, including innovation and hiring.
- Startup Tax Incentives – Angel investor credits, hiring, and digital media incentives for new businesses.
- Ontario Innovation & SR&ED Credits
- BC Innovation & R&D Credits
- Manitoba R&D and Innovation Credits
- Quebec R&D and Innovation Credits
- Saskatchewan Innovation & R&D Credits
- Nova Scotia Innovation & Digital Media Credits
For official SR&ED forms and guidance, visit the CRA SR&ED Program page.