Organize your claim - Claim the SR&ED investment tax credit

Organize your claim

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What is an SR&ED project

An SR&ED project is the grouping of the work you identified as eligible.

Each SR&ED project corresponds to a set of interrelated activities that collectively are necessary in an attempt to achieve scientific or technological advancement. This attempt is pursued through a systematic investigation or search in a field of science or technology by means of experiment or analysis.

The start of the project

The start of an SR&ED project is when you recognize the existence of scientific or technological uncertainty, and you commence work to address or resolve that uncertainty. Recognizing that there is scientific or technological uncertainty is a key step in the systematic investigation or search and shows the need to begin an SR&ED project to address or resolve this uncertainty.

The duration of the project

The duration of an SR&ED project is not a factor in determining whether the work performed meets the definition of SR&ED. Some projects are short, carried out fully within one tax year, while other projects extend over several tax years. As an SR&ED project can span more than one year, a snapshot of the work in a given year may not reflect the overall effort to achieve the scientific or technological advancement. Once an SR&ED project has started, work in any year that is part of the attempt to achieve that advancement is considered part of the SR&ED project.

The completion of the project

The SR&ED project is complete when the scientific or technological knowledge needed has been gained and you have achieved your objective, or when you decide to abandon further attempts to resolve the scientific or technological uncertainty. Success, failure, marketability, or commercial significance of work is not relevant to determining its eligibility. Commercialization or certification might not necessarily mean that the SR&ED project is complete. Neither financial indicators (such as first sale) nor issuing warranties alone are enough to mark the end of an SR&ED project.

How an SR&ED project relates to your business project

After gaining an understanding of the meaning of an SR&ED project, the next step is to look at how an SR&ED project relates to the projects your business conducts. SR&ED can be planned within your business and, in this case, it may be easier to identify the eligible work. However, there are often cases when SR&ED is not planned and occurs because you encountered scientific or technological uncertainty in the course of your business project. In either case, you will need to track and identify the eligible work within your business project(s) and group it into SR&ED project(s).

Group your eligible work into SR&ED projects

To file an SR&ED claim, group your eligible work into one or more SR&ED projects. There are several possible scenarios you may encounter when identifying and grouping your work:

  • all of the work in a given business project is eligible and forms one SR&ED project
  • your business project contains a mix of eligible and ineligible work. In this case, you need to segregate the eligible work and group it into one or more SR&ED projects
  • the SR&ED work is occurring across multiple business projects, but when grouped together, it forms an SR&ED project
  • your business project does not contain any SR&ED work

Key points to consider when grouping work from your business project(s) into SR&ED project(s):

  • eligible work can happen at any time in your business projects
  • both SR&ED and non-SR&ED work can happen concurrently
  • the earlier you can identify eligible work in your business projects, and start tracking it, the easier it will be when it comes time to prepare your claim

How you organize your business project is up to you. What is important is that you are able to identify and group your eligible work into SR&ED projects when it's time to file your claim.

Understand your expenditures

To file a claim, you will need to calculate how much you spent on the SR&ED work performed in the year.

You can also use the Self-Assessment and Learning Tool to help you estimate the amount you may be eligible to claim.

Allowable expenditures

You can claim the allowable expenditures incurred for your eligible work. These may include expenditures for:

Salary or wages

The salary or wages costs incurred for employees’ time spent directly engaged in the SR&ED work during the year can be claimed here. The amounts must be paid in the tax year or within 180 days of the tax year-end to earn ITC. Unpaid amounts, if previously identified, will earn ITC in the year that the original outstanding salary or wages is paid.

These amounts must be incurred and paid in the tax year or paid within 180 days of the tax year-end.

For more information, refer to the SR&ED Salary or Wages Policy.

Materials

CRA's interpretation of the term materials for SR&ED is all the raw materials, substances, or other items that compose the body of a thing at a given moment in the SR&ED process.

For more information, refer to the Materials for SR&ED Policy.

Contracts for SR&ED

When a claimant pays a contractor to conduct SR&ED on their behalf, generally, the cost incurred for the portion of the contract that is SR&ED can be claimed.

For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

Overhead and other expenditures

Within the context of the SR&ED Program, the term overhead and other expenditures is often used to refer to certain expenditures of a current nature that are directly related to the carrying out SR&ED in Canada that would not have otherwise been incurred.

There are two ways you can calculate your SR&ED expenditures, either proxy or traditional. You may only select one method for each tax year and your selection cannot be changed for the tax year once your claim is filed.

Proxy method : Option 1 of 2

Under the proxy method, you do not specifically identify and claim all overhead and other expenditures that you incur for SR&ED during the tax year. You would not include them in the pool of SR&ED expenditures and would not deduct them when calculating income. The proxy method involves using a formula based on expenditures for salary or wages to calculate a substitute amount for SR&ED overhead and other expenditures to calculate the expenditures that qualify for your investment tax credit.

Traditional method : Option 2 of 2

The traditional method involves identifying each overhead cost that was directly related to, and solely because of, the SR&ED work as SR&ED overhead and other expenditures. This amount is included to calculate the expenditures that qualify for your investment tax credit.

For more detailed information about claiming expenditures, please refer to Guide T4088 Section A - Select the method to calculate the SR&ED expenditures.

Third-party payments

A third party payment is generally a payment made by a claimant to an entity to be used for SR&ED carried on in Canada, that is related to a business of the claimant and the claimant must be entitled to exploit the results of the SR&ED.

For more information, refer to the Third-Party Payments Policy.

Gather supporting information

Technical information

Keep any technical information to support your claim. Documents that were generated when the work was being carried out are the most common, but supporting evidence can also include items such as photographs, videos, scrap, or other artefacts that relate to the work.

The best supporting evidence is documentation that is dated and specific to the work performed. However, we will accept various forms of evidence. Most importantly, the evidence you keep must support the information you provided in your application.

Financial information

You must also keep complete and organized records that support the expenditures you claim. How long to keep your records can vary but, in general, all required records and supporting documents must be kept for a period of six years from the end of the last tax year they relate to. For general information on records needed to support financial transactions please visit Keeping records. Records and documents that may be asked for during a review include financial statements, ledgers, journals and vouchers, including electronic records. We may also ask for source documents such as receipts, contracts and general correspondence.

Examples of supporting information

Examples of supporting information for SR&ED work and expenditures include (but are not limited to):

  • project planning documents
  • design of experiments
  • design documents, technical drawings
  • project records, laboratory notebooks
  • design, system architecture, source code (software development)
  • records of trial runs
  • project progress reports
  • minutes of project meetings, virtual meeting chats
  • whiteboard drawings
  • design documents, technical drawings
  • test protocols, data, results, analysis, conclusions
  • final project report, professional publication
  • photographs, videos
  • prototypes, samples
  • scrap, scrap records
  • contracts, lease agreements
  • records of resources allocated to the project
  • time sheets, activity records, payroll records
  • purchase invoices, proofs of payment
  • accounting records

Many of the examples above can be used to support both the work and the expenditures.

See Appendix 2 of Guide T4088, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, for more details on the different forms of supporting evidence for SR&ED work and financial records to support your expenditures.

Doing SR&ED in production or manufacturing environments

In production or manufacturing environments, SR&ED often occurs concurrently with excluded or other non-SR&ED work. It is important to keep track of your SR&ED work separately.

If you are developing an asset, or operating equipment or processes in a production or manufacturing environment, these documents explain how to segregate SR&ED work and the associated expenditures:

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