SR&ED: Canada's flagship R&D tax credit, explained

What SR&ED is

The Scientific Research and Experimental Development (SR&ED) program, administered by the Canada Revenue Agency, is the single largest source of federal R&D support in Canada — several billion dollars in credits claimed each year. It pays a tax credit against eligible research and development spending: salaries, contractor costs, materials and overhead.

Why startups love it

For Canadian-controlled private corporations, the enhanced federal credit is refundable at up to 35% on the first tranche of eligible expenditures — meaning the CRA sends you cash even if you owe no tax and have no revenue. That makes SR&ED one of the few sources of capital that arrives without dilution, repayment or a competitive application. A general non-refundable rate applies to other claimants.

What work qualifies

Qualifying work falls into three buckets: basic research, applied research and experimental development — the last is where most claims sit. The test is technological: you faced a scientific or technological uncertainty, attempted to resolve it through a systematic investigation, and the outcome could not have been known in advance. Many founders assume their work is too ordinary to count, but eligibility is broader than commonly believed.

• Experimental development: engineering prototypes, process improvements, new product development
• Work can qualify even when the experiment fails — you still advanced the knowledge
• Eligible fields include software engineering, materials, biotech, agtech, clean energy and manufacturing
• Routine engineering or debugging to a known standard does not qualify on its own

What you can claim

Eligible expenditures cover the people doing the work, what they consume and who you hire to help. Overhead is handled by the proxy method: rather than tracking electricity and rent, claimants elect a fixed percentage of salaries.

• Salaries and wages of employees doing or directly supporting R&D
• A reasonable salary for incorporated owner-operators actively performing R&D
• Materials consumed or transformed in the experiments
• Subcontractor and third-party payments — generally claimable up to a reduced percentage
• The 55% proxy on salaries in lieu of itemized overhead

How a claim works

Claims are filed on Form T661 with your T2 corporate income tax return, and the SR&ED deadline runs to one year after your fiscal year-end. Because it is claimed after the work is done, the practical skill is eligibility: tracking hours, writing defensible project descriptions and keeping contemporaneous records. Credits are reviewed by the CRA, so quality documentation matters more than aggressive estimates.

Pair it with other sources

SR&ED stacks with grants, IRAP contributions and debt — a grant funds the project, SR&ED refunds a share of the spend, and a loan can bridge the timing gap until the refund lands. Browse the funding directory to see what else fits your stage.