Tech grants for Canadian SMEs: What are SR&ED credits?

Published on 2022-05-27 by Tessa Anaya

With a focus on research and innovation, the Canadian government offers many grants and benefits for SMEs in the country. In this article, we’ll explore the SR&ED credit program: what is it and how can businesses benefit from it?

How to apply for SR&ED credits in Canada

Canada stands proudly as a global hub for technology and innovation. The nation overall consistently appears in the top five countries to found startups, and Toronto, Vancouver, and Montreal all feature in the top 40 cities globally. What’s more, Canada’s startups are attracting record levels of investment from venture capital funds.

To help small and medium business owners get started, and to make it attractive for businesses to base their research and development (R&D) in Canada, the government provides several tax incentives, including its Scientific Research and Experimental Development (SR&ED) Tax Incentive Program. Under this program, businesses can claim deductions, credits, and refunds against their research-related expenditure.

In this article, we explore what SR&ED credits are, what work is eligible, and what else small to medium enterprises (SMEs) may want to consider when carrying out R&D. We also investigate how tools such as financial reporting, human resources, and project management software fit into the equation. 

What are SR&ED credits?

The SR&ED Tax Incentive Program is the largest federal program supporting research and development in Canada, providing $3 billion a year to more than 16,000 organizations.

Essentially, the program allows organizations (including large and small businesses, trusts, and individuals) to pool their R&D expenditure and deduct it against their income. Companies can also claim an investment tax credit (known as an ITC), which reduces the amount of income tax payable.

These incentives provide a tax reduction or credit of between 15% and 35% for R&D expenditures, and can be applied to both past and future tax years, if unused.

There are, of course, conditions to the program. Different types of businesses can claim reductions at different rates, and there are some restrictions as to what R&D work is eligible for SR&ED tax credits.

The government is keen that as many businesses as possible are aware of this program and make applications. As such, it has an outreach program, with online and in-person events to show businesses how to claim research and development funding.

Did you know? Project management software is a great way to manage research and development programs to ensure they remain on budget, on time, and on target. It automates the assignment of tasks, helps allocate resources according to needs, and provides tools for tracking time, expenses, project milestones, and more.

How do I claim SR&ED credits?

First, any R&D expenditures that are to be deducted must meet qualifying criteria. The guidelines stipulate not only what work falls under the terms of the program, but why and how it is carried out. For example, research must address “scientific or technical uncertainty” and seek to generate or discover new knowledge that did not exist either within your organization or the general public domain. Furthermore, work must be experimental or analytical, involving a hypothesis and working to test that hypothesis.

Businesses can claim for a range of R&D expenses, including employee wages, materials, contracts, overheads, and payments to third parties. In order to make claims against these costs, businesses must ensure that they are tracking them. This is where financial reporting software comes in. These tools help SMEs to collect, translate and consolidate data from various systems and geographic locations. They also allow companies to import and export financial data from other systems (such as HR software) and provide analytics so managers can maintain an overview of budgets. These features make it easier to submit accurate information when applying for tax credits or deductions under the SR&ED program.

Canadian innovation in action

When people think of innovation, many think of Silicon Valley and its network of private companies, universities, and research institutions. In Canada, the government is building similar hotspots for growth with its Superclusters initiative backed by billions of dollars in funding. The goal of the clusters is to generate 50,000 new jobs and $50 billion in added GDP, as well as providing much needed digital skills training and creating new opportunities for under-represented groups.

What other tech grants are available in Canada?

While the SR&ED Tax Incentive Program is the largest program available to Canadian innovators, it is not the only one. SMEs may find these innovation initiatives better suited to their needs: 

Getting your R&D to the next level 

Funding and incentives, including the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program, are a great way for Canadian SMEs to deliver groundbreaking innovation and expand their business. Having the right management software in place —as well as a clear R&D plan— helps businesses understand where they might require help and makes it easier to develop a robust case when applying for assistance.

4 steps for shaping your R&D program

All the pieces are in place for SMEs to succeed in Canada —it’s now up to you to make it happen.

Looking for financial reporting software? Browse our catalogue.

This article may refer to products, programs or services that are not available in your country, or that may be restricted under the laws or regulations of your country. We suggest that you consult the software provider directly for information regarding product availability and compliance with local laws.

About the author

Content Analyst at Capterra, dedicated to helping SMBs access the insights that elevate their organizations. B.A. in English, University of Michigan. Based in Barcelona.

Content Analyst at Capterra, dedicated to helping SMBs access the insights that elevate their organizations. B.A. in English, University of Michigan. Based in Barcelona.