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The Scientific Research and Experimental Development (SR&ED) tax incentive program is one of the main sources of innovation funding in Canada. Yet many Canadian businesses miss out on tax credits they may be entitled to because they are unfamiliar with the eligibility criteria or do not recognize the nature of the work that qualifies.
Contrary to popular belief, the SR&ED program is not limited to research laboratories, large technology companies or organizations with dedicated R&D departments. A manufacturing SME developing a new production process, a startup working to solve a complex technical problem, or a company improving software performance may also qualify.
The financial potential is significant. Depending on the size of the business, its legal structure, tax situation and the nature of its expenditures, SR&ED tax credits can represent a substantial recovery of development costs, sometimes in the form of a cash refund.
The key question is therefore not whether your business officially conducts research and development, but whether its activities meet the program’s scientific and technological criteria.
In this guide, ABGI Canada explains how the SR&ED tax credit works, the eligibility criteria, the expenditures that can be claimed and the amounts your business may be able to recover.
The SR&ED tax credit is a federal tax incentive administered by the Canada Revenue Agency (CRA). It allows businesses to recover a portion of the expenditures incurred on eligible scientific research and experimental development activities.
The SR&ED program aims to encourage businesses to conduct research and development in Canada, address scientific or technological challenges and generate new knowledge.
It is a major federal innovation incentive, particularly for businesses investing in the development of products, processes, materials or technologies.
The program provides two main forms of tax support:
As a result, a business may receive an SR&ED refund even if it has no taxable income, subject to the applicable refund conditions.
The federal rate primarily depends on the corporation’s status, Canadian control, taxable capital and eligible expenditures.
The enhanced rate of 35% may apply to eligible expenditures up to the applicable annual expenditure limit, generally $6 million for taxation years beginning after December 15, 2024. This limit may be reduced based on certain financial thresholds and associated corporations.
For eligible current expenditures, the enhanced-rate credit may be fully refundable for qualifying corporations. Capital expenditures are subject to different refund rules.
Key takeaway: The 35% rate does not automatically apply to every Canadian business. An assessment of the corporation’s ownership structure and financial situation is required to determine the applicable rate.
| Type of corporation | Basic federal rate | Potential enhanced rate |
|---|---|---|
| Canadian-controlled private corporation (CCPC) | 15% | 35% |
| Eligible Canadian public corporation | 15% | 35% |
| Other corporations | 15% | Not applicable |
The federal SR&ED tax credit may be combined with certain provincial tax credits, subject to the applicable conditions.
In Québec, the Tax Credit for Research, Innovation and Commercialization (CRIC) replaced the former R&D tax credits for taxation years beginning after March 25, 2025.
Québec businesses should therefore assess federal and provincial incentives together when developing their innovation funding strategy. Eligible expenditures, criteria and calculation methods are not necessarily the same.
A project may qualify for SR&ED when it seeks to achieve a scientific or technological advancement and is based on a systematic investigation or search through experimentation or analysis.
The determining factor is the presence of a scientific or technological uncertainty that cannot be resolved directly using existing knowledge or established practices.
The CRA identifies three main categories of eligible work:
Experimental development is particularly relevant to SMEs and industrial businesses.
To determine whether a project meets the SR&ED requirements, four key dimensions must be examined.
1. Technological advancement
The project must seek to advance scientific or technological knowledge. Simply creating a new product for your business is not enough: the work must aim to go beyond existing knowledge or technological capabilities.
2. Scientific or technological uncertainty
The business must encounter a problem whose solution cannot be determined directly using the knowledge, methods or practices available at the beginning of the work.
Example: A company wants to develop a more heat-resistant material, but existing knowledge cannot predict which combinations of components will achieve the desired properties.
3. A systematic experimental approach
The business must follow a structured process that includes:
4. Supporting documentation
The business must be able to demonstrate the nature of the work performed and the expenditures incurred.
Useful supporting documents include technical reports, laboratory notebooks, test results, successive prototype versions, technical meeting minutes and employee timesheets.
Documentation is not simply an administrative formality. It helps demonstrate that the work actually meets the program’s eligibility criteria.
It is important to understand that a single project may include both eligible and ineligible activities. The assessment must therefore focus on the work actually performed, rather than the project as a whole.
| Project | Eligible? | Why? |
|---|---|---|
| Developing a new material with unknown properties | Potentially yes | Scientific uncertainty and experimentation |
| Optimizing a complex manufacturing process | Potentially yes | Investigation of a new technological solution |
| Developing an AI algorithm requiring technical experimentation | Potentially yes | Technological uncertainty and systematic testing |
| Creating software with standard features | Generally no | Use of existing knowledge and technologies |
| Routine quality control testing | No | Excluded routine activity |
| Making graphic changes to an application | No | Aesthetic modification without technological advancement |
| Developing a new production process | Potentially yes | May require new technological knowledge |
Any business conducting eligible research and development work in Canada may potentially benefit from the SR&ED program, regardless of its industry or stage of development.
You do not need to be a large corporation, own a research laboratory or have a dedicated R&D department to submit an SR&ED claim. Startups, SMEs and manufacturing businesses may also qualify.
The following business profiles may be eligible for the program:
| Business profile | Examples of potentially eligible work |
|---|---|
| SME | Developing new products or improving processes |
| Technology startup | Developing a technology or solving a complex IT problem |
| Manufacturing business | Experimentally optimizing a manufacturing process |
| Software company | Developing algorithms or solving complex technical problems |
| Artificial intelligence company | Experimenting with new models, architectures or technical methods |
| Agri-food company | Developing new formulations or processing methods |
| Industrial company | Improving materials, equipment or automated systems |
| Biotechnology company | Applied research and development of biological processes |
No. A business does not need to be profitable to benefit from the program.
Certain corporations may receive a cash refund even when they report losses, particularly when they qualify for the enhanced refundable 35% rate.
However, a business must still meet the applicable tax and administrative requirements, including those relating to its legal status and the expenditures being claimed.
Eligible SR&ED expenditures are costs directly associated with carrying out eligible work, subject to the CRA’s calculation rules and exclusions.
The main expenditure categories are as follows:
| Category | Potentially eligible expenditures | Main conditions |
|---|---|---|
| Salaries | Compensation paid to employees involved in the work | Portion corresponding to the time spent on eligible activities |
| Contract work | Fees paid to consultants, engineers or technical specialists | SR&ED work performed on behalf of the business, generally in Canada |
| Materials | Raw materials and components used in experiments | Materials consumed or transformed during the work |
| Equipment | Acquisition of certain equipment and depreciable property | Specific rules apply to property acquired after December 15, 2024 |
| Equipment rentals | Rental costs for certain equipment | Conditions apply to expenditures incurred after December 15, 2024 |
| Overhead expenses | Certain general expenses associated with R&D activities | Traditional method only, subject to the applicable rules |
Salaries are often the largest category of expenditures claimed by businesses.
A business may include the portion of compensation corresponding to the activities of its:
The calculation must be based on the time actually spent on eligible activities, not simply on the employee’s job title.
Expenditures paid to consultants and subcontractors may also qualify when they perform SR&ED work on behalf of the business.
However, it is important to distinguish experimental development assignments from routine professional services.
For example, an assignment involving the resolution of a complex technological problem through experimentation may qualify, whereas standard programming or the implementation of an existing solution generally does not.
The CRA allows businesses to use two methods to calculate eligible expenditures:
The method selected can have a significant impact on the amount claimed. It is therefore advisable to compare both options before finalizing the claim.
Important: Not all expenditures associated with a project automatically qualify. Grants and other government assistance may reduce the eligible expenditure base used to calculate the tax credit.
The amount recoverable depends on the volume of eligible expenditures, the business’s tax status, the applicable rate and any financial assistance received.
To illustrate the program’s potential, here are three hypothetical scenarios.
The following examples assume a Canadian-controlled private corporation (CCPC) eligible for the enhanced 35% rate, fully eligible current expenditures below the applicable expenditure limit, and no reductions resulting from government assistance.
| Business type | Project | Eligible expenditures | Illustrative federal rate | Potential federal tax credit |
|---|---|---|---|---|
| Technology startup | Developing a software platform and conducting technical experiments | $100,000 | 35% | $35,000 |
| Manufacturing SME | Developing and experimentally optimizing a manufacturing process | $250,000 | 35% | $87,500 |
| Industrial company | Developing new materials and conducting performance testing | $500,000 | 35% | $175,000 |
These scenarios illustrate why SR&ED is an important funding lever for businesses that regularly invest in technological development.
Yes, in certain situations.
A business may benefit from several innovation funding programs to support its projects. However, grants and other forms of assistance related to the same expenditures may reduce the expenditure base eligible for the SR&ED tax credit.
It is therefore essential to plan funding strategically and take the interactions between programs into account.
For a Québec-based business, the assessment may include both the federal SR&ED tax credit and the provincial CRIC tax credit, subject to the eligibility criteria of each measure.
An SR&ED claim may be rejected in whole or in part when a business cannot demonstrate that its work and expenditures meet the program requirements.
The most common mistakes include:
1. Insufficient documentation
Failing to retain experimental results, prototype versions or technical reports makes it more difficult to demonstrate the work performed.
2. Poor project definition
Presenting a project as a straightforward commercial development activity, rather than clearly identifying the technological uncertainties and experimental work involved, can negatively affect the assessment.
3. No technological uncertainty
An operational improvement or technology implementation does not become eligible simply because it is complex or costly.
4. Incorrect expenditure calculations
Including ineligible salaries, routine activities, previously funded expenditures or incorrectly calculated indirect costs may result in adjustments.
5. Missing the filing deadline
For corporations, the required forms must generally be filed within 18 months of the end of the relevant taxation year. Expenditures not reported before the deadline will normally no longer qualify for the corresponding SR&ED incentives.
It is recommended that businesses implement regular tracking of their development activities:
Good preparation makes it easier to file the claim and respond to CRA questions in the event of an audit or review.
Working with SR&ED consultants helps businesses identify eligible projects, structure their expenditures and ensure their claims are properly prepared.
The program involves two complementary dimensions: a technical assessment of the work performed and a tax assessment of the expenditures that can be claimed.
Specialized support can help businesses:
Some research and development activities are not recognized as such by the businesses carrying them out. An external perspective can help identify technological uncertainties and experimental work that may meet the CRA’s criteria.
A detailed review of salaries, subcontractors, materials and other expenditures helps determine the amounts that may be claimed.
A well-structured claim, supported by consistent technical and financial documentation, facilitates discussions with the CRA and helps substantiate the work reported.
SR&ED should not be considered in isolation. Other innovation tax credits and funding programs may complement the available tax incentives.
ABGI Canada supports Canadian businesses in identifying, obtaining and optimizing government funding and tax incentives related to innovation.
Our SR&ED services include:
Our objective is to help businesses maximize the value of their innovation investments and access the financial support they may be entitled to.
Have you developed a new product, improved an industrial process or encountered technological challenges as part of your operations? This work could represent a funding opportunity.
The SR&ED program represents a significant funding opportunity for Canadian businesses investing in scientific research and experimental development.
Whether you are a technology startup, a manufacturing SME or an industrial company, your activities may qualify if they meet the CRA’s scientific and technological criteria.
The key points to remember are:
Want to know whether your business qualifies for the SR&ED tax credit? ABGI Canada’s experts can conduct a preliminary assessment of your projects and identify the funding opportunities you may be eligible for.
Contact ABGI Canada to assess your innovation projects and discover how to maximize the value of your research and development investments.
This article is provided for informational purposes only. Tax rules and eligibility criteria may change. The applicable conditions should be verified for each taxation year. Sources last reviewed: November 4, 2026.
