Every five years, the Canada Revenue Agency (CRA) will summarize the previous situation of the Scientific Research and Experimental Development (SR&ED) projects. Since the 2016-2021 report has not been released yet, let us first review the 2011-2015 situation.
According to Appendix 1 of the Guide to form T661, all included industries can apply for SR&ED tax credits. However, companies from the following industries have significantly more SR&ED cases, they are:
- manufacturing industry
- professional science industry
- information and communications technology (ICT) industry.
Therefore, to some extent, if your business comes from these industries, it might be a bit easier to receive SR&ED funding from one of the largest R&D tax incentive programs in Canada.
However, compared to above three industries, if you are running a business in other industries such as a a retail store or a marketing agency, you can still get tax refunds from SR&ED for the eligible projects.
SR&ED in Manufacturing Industry
The definition of the manufacturing industry is quite broad and contains a variety of related activities. According to Innovation, Science and Economic Development Canada, manufacturing mainly includes assembling components, blending materials, and finishing products. In that case, research and development (R&D) is necessary for Canadian manufacturers. SR&ED will fuel their innovations and make them stay competitive in this industry.
Eligible Activities in Manufacturing Sector
Eligible activities for SR&ED are the same across all industries, which typically focus on R&Ds and how they are conducted. An eligible SR&ED project needs to reflect a scientific or technological uncertainty that cannot be solved by any existing product, process or material. Generally speaking, projects that qualify for SR&ED may include the following activities:
- Integrating components not originally designed to fit or work together;
- Combining materials in innovative ways or developing new materials to solve current problems;
- Developing new processes of manufactured products that contain technological advancements;
- Adjusting current products or equipment to achieve new objectives;
- Improving or modifying a process or product.
Manufacturing works that do not generate new knowledge or information and fail to address any uncertainty are not qualified for SR&ED. In other words, the following activities are not eligible:
- Quality control;
- Routine testing of processes, products, materials, and devices;
- Commercial development and production of a new or improved product;
- Activities that related to drilling, prospecting, and/or production of minerals, petroleum, or natural gas.
SR&ED in Professional Science Sector
There are four main fields of professional science and they can be subdivided into a variety of categories:
- Natural and Formal Sciences
- Engineering and Technology
- Medical and Health Sciences
- Agricultural Sciences
Each of the specific disciplines has a unique code and is required when submitting the SR&ED application form. Therefore, it is of vital importance to do research in advance on the CRA website.
Natural and Formal Sciences
Eligible R&D activities in natural and formal sciences may include the research study in math, logic, statistics and natural phenomenon. This section can be subdivided into the following categories:
- 1.01 – Mathematics
- 1.02 – Computer and Information Sciences
- 1.03 – Physical Sciences
- 1.04 – Chemical Sciences
- 1.05 – Earth and related Environmental Sciences
- 1.06 – Biological Sciences
Engineering and Technology
Eligible R&D activities in engineering and technology may include the innovation, creation, design, construction, operation and maintenance of structures, machines, software and other related devices. This section can be subdivided into the following categories:
- 2.01 – Civil Engineering
- 2.02 – Electrical and Electronic Engineering
- 2.03 – Mechanical Engineering
- 2.04 – Chemical Engineering
- 2.05 – Materials Engineering
- 2.06 – Medical Engineering
- 2.07 – Environmental Engineering
- 2.08 – Environmental Biotechnology
- 2.09 – Industrial Biotechnology
- 2.10 – Nano-technology
Medical and Health Sciences
Medical and health sciences have always been one of the essential fields in Canada, especially right now during the COVID-19. However, they do not have a long history of receiving benefits from SR&ED. This section can be subdivided into the following categories:
- 3.01 – Basic Medicine
- 3.02 – Clinical Medicine
- 3.03 – Health Sciences
- 3.04 – Medical Biotechnology
Agriculture may not sound like a typical R&D field, but one of the SR&ED advantages is that it is never limited to specific industries. As a result, the projects in agricultural sciences sector may also be qualified for applying SR&ED. This section can be subdivided into the following categories:
- 4.01 – Agriculture, Forestry and Fisheries
- 4.02 – Animal and Dairy Science
- 4.03 – Veterinary Science
- 4.04 – Agricultural Biotechnology
SR&ED in Information and Communications Technology (ICT) Industry
Information and communications technology (ICT) is crucial in the present era that it stands out from professional science. It is a fast-paced industry dealing with new standards and devices every year or two. There will be more SR&ED cases related to artificial intelligence (AI) and machine learning (ML) in the future, but currently, most applicants are from two categories: software development and telecommunications.
There is no doubt that software plays a significant role in creating or improving modern products in almost every sector. As a consequence, it is not surprising that a significant amount of SR&ED claims involve software development. Generally speaking, eligible activities in this category may include:
- Creating or improving techniques and methods in the storage or management of data;
- Creating or improving infrastructures such as cloud and other software-based systems;
- Developing new software technology;
- Advancements in other categories such as images, videos, controls and automation.
The telecommunications landscape has changed dramatically since the introduction of smartphones. Customers are continuously looking for more efficient, versatile and secure methods to communicate with each other, so it is pretty easy to understand why there are plenty of R&Ds in this category. Eligible telecommunications activities for SR&ED may include:
- Creating new technologies to optimize the network bandwidth;
- Replacing older telephone services with newer technologies;
- Developing new equipment to provide customers with a seamless telecommunications experience anytime and anywhere;
- Improving security infrastructure that supports broader network services access;
- Developing new storage techniques to solve transaction problems.
As mentioned initially, if your business belongs to the manufacturing sector, professional science sector or ICT sector, it might be easier to apply and get a tax refund from the SR&ED program. The helpful resource will give more idea on What can be claimed as eligible expenses in SR&ED application.
But if you are operating any other small or medium businesses, you might be eligible as well. Want to know more about how many tax credits you can get? Count from the SR&ED calculator or contact the SR&ED professional team, we will get back and talk to you soon.