SR&ED Origins

SR&ED Investment Tax Credits

The Government of Canada has been issuing tax credits for SR&ED activities since 1977 but the present version of the Federal program with cash refunds for CCPC's was put  in place on May 24, 1985.

Perhaps $25 billion in cash & Tax Credits since 1985!

The original T661 form for claiming "R&D" was two pages with a 2 page guide citing only the Income Tax Act. The meaning of Scientific Research came from a 5 page Revenue Canada Bulletin (IT-439) dated September 1979. This was expanded to the less restrictive meaning of "Scientific Research and Experimental Development" (SR&ED) in Information Circular 86-4 in 1986.  After 1988, the forms and guides began to use the acronym "SR&ED" as the program moved away from traditional concepts of R&D towards the practical intent of parliamentarians: new industrial products and processes.

A major change in administration of the program came after a conference between industry trade associations and the Revenue Minister (Herb Dhaliwal) at the Renaissance Vancouver Hotel on June 26, 1998.  This led to a separate Directorate for SR&ED within Canada Revenue (CRA) and improved public relations.   Industry lobby groups have had a major impact on the evolution of the SR&ED incentives and eligibility rules.  Their appetite for even more favourable access to public funds has not waned.

SR&ED Ancestors

Prior to 1961, no tax credits existed but SR&ED current expenditures could be deducted in the year incurred and capital costs deducted over a 3 year period.  From 1962 to 1966, the Government of Canada made capital expenditures fully deductible in the first year and added an additional tax deduction of 50% in excess of a base level. 

From 1966 to 1975, SR&ED was encouraged through grants under the Industrial Research and Development Incentives Act (IRDIA).  Administered by the Department of Industry, Trade and Commerce.

The Investment Tax Credits available through the Federal tax system were first extended to SR&ED activities in March, 1977.  Modest credits of  5 to 10% were increased over the years  based on regions and corporate structure to a maximum of 35% after 1985.

Evolution of  SR&ED Definition

Much of the confusion created by government publications is the result of a legacy of legalese and academic definitions for SR&ED.  The IRDIA grants program introduced much of the jargon now imbedded in the Income Tax Act [Sect. 248(1)]  with respect to the definition of SR&ED as well as two criteria used for administration: "uncertainty" and "scientific content" derived from the Frascati Manual of OECD (1963).  

The IRDIA grants did not recognize engineering work as "scientific research and development".  The IRDIA brochure of 1967 concluded that: "..the practice of engineering does not normally involve scientific uncertainties; its function is to assemble the established technological information on any subject, to select whatever is pertinent and from it work out a practical design.  If the result is not in accordance with expectations, the cause of failure would be either the incorrect application of engineering principles or  errors of information...".

 IRDIA focused on the explanation of scientific phenomenon and advancing scientific knowledge.  In contrast, the SR&ED program today as it has evolved,  funds perhaps 95% engineering activities with less than 5%  attributable to advancing knowledge. In recent publications (2001-2003), the SR&ED Directorate has come full circle and has disconnected experimental development from  increased knowledge.  Under the new rules, while it is necessary to strive towards a technological advancement, the achievement of success or the understanding of why it worked, is not. 

The definition of what is SR&ED has not been static - each year there are new "clarifications" based on Ottawa's attempt at remote control of Canadian innovation through taxation incentives.  Companies are advised to seek expert opinion before assembling a claim.

• Canada Gazette, 1967. Industrial Research and Development Incentives Regulations, Vol.101, June 14.

• OECD, 1963. The Measurement of Scientific and Technological Activities, Frascati Manual, Organization for Economic Co-Operation and Development, Paris.