The SR&ED Tax Credit Program is the largest incentive program established to encourage innovation for companies operating in Canada, providing greater than $4 billion in tax credits and refunds (for 2009).   In order to obtain the refunds/tax credits available through this program, companies must be engaging in eligible projects which meet three criteria:

1) The project sought to achieve a Scientific or Technological Advancement;

2) In attempting to achieve this Advancement, the company encountered Scientific or Technological Obstacle(s); and

3) The company sought to resolve the Obstacle(s) through a Systematic Investigation.

The most important thing to note about the SR&ED legislation is that it is NOT a checklist which specifically includes certain activities.  The three legislative criteria are abstract.  They are, therefore, meant to be argued using the facts of the work conducted and the T661 Technical Report is the primary means of argumentation.  

Three classes of refunds exist for companies engaging in eligible work based on the company’s ownership structure and taxable income. The scope for the expenditures considered as eligible depends primarily upon the strength and type of arguments presented in the T661.

Tier 1: Canadian Controlled Private Corporations with a taxable income less than $500,000

• You can receive 68% of the salary expenditures incurred in eligible work (which includes proxy – the recommended method for incorporating overhead expenses).
• You can receive 45% of the material, sub-contractor and capital expenditures incurred in eligible work.
• These can be received as cash/tax credits depending on the amount of tax owed by your company.