Most countries around the world have some form of R&D tax credit program. In fact, more than 90 of the OECD’s top-performing countries have R&D tax credit programs including the U.S., China, the Netherlands, the UK, and France. These countries, as well as Canada, use OECD guidelines to define what constitutes industrial/business R&D:
“Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, that is directed to producing new materials, products or devices; to installing new processes, systems and services; or to improving substantially those already produced or installed.” (https://stats.oecd.org)
It’s up to each country to determine for themselves what research and development work and costs associated with that work are eligible for the tax credit, their claim assessment process, and how much of an incentive they’re willing to provide for the various incurred expenses. Compared to its SR&ED counterparts, Canada’s interpretation is very specific about what constitutes eligible R&D and what it considers scientific research and experimental development.
Canada’s Scientific Research and Experimental Development Process
For a claim to be considered for Canada’s program, scientific research and experimental development work needs to address a technological uncertainty in a given industry and project, and generate new knowledge about that uncertainty that wouldn’t be available in the public domain, or where the knowledge in the public domain and standard practices are insufficient to solve the uncertainty.
SR&ED work does not have to completely, successfully resolve the technological uncertainty to be potentially eligible within a fiscal year. Some SR&ED work may crossover several fiscal years until some sort of resolution occurs. Research and experimental development work is considered “complete” once the technological uncertainties which initiated the work or were encountered during the work are resolved or abandoned. For some projects, many avenues of experimental development may be abandoned before achieving a commercially viable product. SR&ED is not only about finding successful resolutions for technological uncertainties in your given industry, but also failures in that experimental development which ultimately generate new knowledge about the kind of uncertainties and obstacles you encountered.
The Canadian SR&ED Advantage
Compared to other OECD SR&ED incentive programs, Canada’s program is quite generous. An eligible Canadian controlled private company generally earns cash refundable SR&ED tax credits of over 40 per cent of eligible SR&ED expenditures—though this number can vary from province to province. This is 4x more than the U.S. program, 3.2x more than China’s program, 1.5x more than the UK for similar sized companies, and 1.3x more than France’s program.
Companies can claim SR&ED-related projects and expenditures and potentially receive tax credits every year.