Scientific Research and Experimental Development (SR&ED) play a crucial role in the innovation and competitiveness of Canadian businesses. These activities enable companies to create new products, improve their processes, and stay at the forefront of technology. To support these efforts, the Government of Canada, along with several provincial governments, offers tax credits. These fiscal incentives are designed to encourage businesses to invest more in research and development.

SR&ED tax credits allow businesses to reduce their income tax based on eligible expenses related to research and development. This includes, for example, costs associated with researchers’ salaries, materials used in experiments, and overhead costs related to R&D projects. By reducing the tax burden on businesses, these tax credits facilitate investment in innovative projects that can lead to significant technological advancements. In addition to promoting the competitiveness of Canadian businesses on the international stage, these incentives contribute to the creation of highly skilled jobs in Canada.

Federal SR&ED Tax Credits

The federal SR&ED tax credit program is administered by the Canada Revenue Agency (CRA). Corporations, individuals, trusts, and partnerships that perform eligible work can benefit from these tax credits.

There are two main types of federal SR&ED tax credits:

• Income deduction: Businesses can claim a deduction on their taxable income for eligible SR&ED expenses.
• Investment tax credit (ITC): Businesses can obtain an investment tax credit for eligible expenses. The ITC can be refundable or non-refundable.

The base rate of the ITC is 15% of eligible expenses for corporations, individuals, trusts, and partners of a partnership. Canadian-controlled private corporations (CCPCs) can benefit from an enhanced rate of 35% for eligible expenses up to a maximum threshold of $3 million. This ceiling was raised to $4.5 million following the announcement of the latest federal budget on December 13, 2024.

For work to be eligible for SR&ED, it must be carried out in Canada and meet two criteria:

• Overcome technological uncertainties and advance scientific or technological knowledge.
• Be systematic scientific or technological research through experimentation or analysis.

Eligible types of work include pure research, applied research, experimental development, as well as technological support work if it is proportional to the needs and directly supports SR&ED work.

Businesses must submit their SR&ED tax credit claim with their annual tax return. The claim must include a detailed description of the work performed, as well as the associated expenses.

Provincial SR&ED Tax Credits

In addition to federal tax credits, several provinces offer SR&ED tax credits. These credits vary based on provincial policies and local economic objectives.

Québec

Quebec is the most generous province. For fiscal years beginning before March 25, 2025, Quebec offers eight tax measures to help businesses finance their R&D.

R&D tax credit for researchers’ salaries

30% tax credit for SMEs and 14% for large businesses on R&D salaries or 50% of the cost of a subcontracting contract. Exclusion thresholds: $50,000 for SMEs, $225,000 for large businesses.

R&D tax credit for university research

30% for SMEs and 14% for large businesses on 80% of an R&D contract with a university or research center.

R&D tax credit for pre-competitive research in private partnership

30% for SMEs and 14% for large businesses on 100% of current R&D expenses and 80% of a subcontracting contract.

R&D tax credit for contributions to a research consortium

30% for SMEs and 14% for large businesses on 100% of dues and contributions.

Tax credit for industrial design

24% for SMEs and 12% for large businesses on designers’ or pattern makers’ salaries, 50% of a subcontracting contract, equipment costs.

Tax credit for technology adaptation services

40% on 80% of fees for liaison and transfer services provided by a CCTT or CLT.

Tax holiday for foreign researchers

Income deduction of 100% for the first two years, then 75%, 50%, and 25% for the next three years.

Tax holiday for foreign experts

Income deduction of 100% for the first two years, then 75%, 50%, and 25% for the next three years.

For fiscal years beginning after March 25, 2025, these tax measures will be replaced by the Research, Innovation, and Commercialization Tax Credit (CRIC). This tax credit is fully refundable and supports R&D and pre-commercialization activities. The aid rate is 30% on the first million dollars of eligible expenses that exceed the exclusion threshold (which will be at least $50,000), then 20% for eligible expenses beyond this limit of $1 million. It applies to labor expenses, equipment acquisition costs, and 50% of the amount of a contract concluded with a subcontractor, which may include a university, research center, or research consortium.

Ontario

Ontario offers several SR&ED tax credits:

• Ontario Innovation Tax Credit (OITC): Eligible corporations can claim a refundable tax credit at a rate of 8% within the annual limit of $3 million in expenses. Only expenses for SR&ED carried out in Ontario, and for which the taxpayer is eligible for the federal SR&ED ITC, are eligible for the OITC.
• Ontario Research and Development Tax Credit (ORDTC): Eligible corporations can claim a non-refundable tax credit of 3.5% for eligible expenses in scientific research and experimental development activities conducted in Ontario to reduce corporate income tax payable in Ontario.
• Ontario Business-Research Institute Tax Credit (OBRITC): Eligible businesses can claim a refundable tax credit of 20% for eligible expenses in scientific research and experimental development activities conducted in Ontario under a contract with eligible research institutes.

Alberta

Alberta offers the Innovation Employment Grant (IEG), a refundable tax credit for corporations that incur R&D expenses in Alberta. Expenses must have been incurred after December 31, 2020, and be eligible for the federal SR&ED program. The IEG offers:

• A payment of 8% for R&D expenses up to the corporation’s base level of expenses.
• An enhanced payment of 20% for expenses that exceed this level.

This grant can cover up to $4 million in annual R&D expenses.

Manitoba, Nouvelle-Ecosse, Yukon, Nouveau-Brunswick et Terre-Neuve-et-Labrador 

Manitoba, Nova Scotia, Yukon, New Brunswick, and Newfoundland and Labrador offer a refundable tax credit of 15% for eligible SR&ED expenses, aimed at Canadian-controlled private corporations (CCPCs) and partnerships.

Colombie-Britannique et en Saskatchewan

In British Columbia and Saskatchewan, these same entities (CCPCs and partnerships) can benefit from a refundable tax credit of 10% for eligible SR&ED expenses.

Only the provinces and territories of Prince Edward Island, Nunavut, and the Northwest Territories do not offer a tax credit for research and development.

Conclusion

SR&ED tax credits in Canada are powerful tools to encourage innovation and economic growth. By offering substantial fiscal incentives at both the federal and provincial levels, Canada actively supports businesses that invest in research and development.

To maximize the benefits of these tax credits, it is important to fully understand the requirements and application processes. Consulting experts can be very helpful in this regard.