History of SR&ED

“If you watch closely, history does nothing but repeat itself. What we call chaos is just patterns we haven’t recognized. What we call random is just patterns we can’t decipher.” ― Chuck Palahniuk, Survivor

To understand where things are going, especially in matters of public policy, one needs to properly comprehend the past.

We have divided the timeline into multiple periods, based on significant milestone events:

1944 – 1985

Summary

In this period, traditional tax measures such as the tax credit and the deduction were introduced and have persisted in the Income Tax Act up until today.  Other tax measures were introduced but were found to be deficient to their intended purpose.  Overall, three different overhauls occurred during this period, with each attempting to close tax loopholes related to the earlier iterations.  The precursor to the modern-day SR&ED program, the Industrial Research and Development Incentives Act (IRDIA), was also first created during this period but was found to be inefficient in attaining its goals and was closed in 1975. In short, this period saw the federal government trying a litany of approaches before settling on the basis of the modern SR&ED program circa 1986, which would then be continuously refined up to the present.

Key Dates

1944 – All current expenditures and one-third of capital expenditures on scientific research can be deducted.

1961 – Capital expenditures incurred in Canada for research become fully deductible.

1962 – Corporations can claim an additional tax deduction of 50% for incremental current and capital expenditures on scientific research.

1967 – Elimination of the additional tax deduction of 50%.  Coming into force of the Industrial Research and Development Incentives Act (IRDIA), under which the federal government awards grants covering 25% of current and capital expenditures in respect of SR&ED.

1975 – IRDIA program is eliminated.

1977 – Corporations can claim an SR&ED tax credit of between 5% and 10%, depending on the size of the firm and the location of SR&ED activities.  The value of the tax credit must be included in the taxable income.

1978 – Additional 50% deduction for incremental current and capital expenditures (base:  average of 3 preceding years).  The tax credit rate is raised to 10% in general, 20% in Atlantic and Gaspé regions, and 25% for small CCPCs.

1983 – The additional 50% deduction for incremental RS&ED is replaced by a 10% increase in the tax credit rates:  basic rate (20%), Atlantic and Gaspé (30%) and small CCPCs (35%).  The 100% deduction can be carried forward indefinitely and unused tax credits can be carried back for 3 years or forward for 7 years.  Partial refundability of unused tax credits is introduced with 40% for small CCPCs and 20% for the others.  The Scientific Research Tax Credit (SRTC) is introduced.

1985 – The SRTC is eliminated due to multiple fraud convictions.¹

1986 – 1994

Summary

This period was marked by fine-tuning of the tax credit and deduction so as to facilitate their use and simplify the administration process for the modern SR&ED program. This was achieved by redefining the meaning of “scientific research and experimental development” according to the Income Tax Act. With respect to streamlined administration, a time limit was set in 1994 with respect to carrying forward SR&ED tax credits for previous years.

Key Dates

1986 – New terminology of SR&ED for income tax purposes and buildings excluded from the definition.  To qualify for tax incentives, 90% of expenditures must be attributable to SR&ED.  Carry-forward provisions for unused tax credits are increased to 10 years.  Refundable tax credit at the basic rate of 20% for large corporations is eliminated.

1992 – A proxy can be used to calculate the portion of overhead expenses and administrative costs directly attributable to SR&ED.  Expenditures on machinery and equipment primarily used for SR&ED (more than 50%) also qualify for the tax credit.

1993 – The tax credit available to small corporations is extended to CCPCs with taxable incomes of between $200,000 and $400,000.

1994 – The special 30% tax credit rate applicable in the Atlantic and Gaspé regions is eliminated.  The exemptions applying to sole-purpose SR&ED performers are eliminated.  A time limit is set for identifying SR&ED expenditures incurred in previous years.

1995 – 2002

Summary

This period has characteristically focused on further fine-tuning of policies surrounding SR&ED tax credits and deductions, achieved through implementing various policies and mechanisms designed to limit SR&ED funding to purposes amenable to the goals of the SR&ED program. The government extended eligibility to all businesses investing in information technology R&D, including financial institutions. Changes were made to the way SR&ED contracts were handled, as well as payments to third parties for SR&ED. In 1995, the federal government limited the tax credits receivable for expenditures related to SR&ED not yet incurred. As well, it was ensured in 1998 that tax credits would be provided on only the net cost of SR&ED, as opposed to the sale cost of the product of an SR&ED project.

Key Dates

1995 – Changes are made with respect to information technology expenditures, contract research and non-arm’s length transactions, third-party payments, and unpaid amounts.

1998 – Eligible SR&ED expenditures must be reduced by the revenue gained from the sale of a product of an SR&ED project.  A review of the administration of tax incentives for SR&ED is undertaken and a new, simplified form for the tax credit is developed.

1999 – When the product of an SR&ED project is sold, the overall cost of the project is reduced, and investment tax credits are provided only on the net cost of performing the research. A review of the administration of tax incentives for SR&ED is undertaken and a new, simplified form for the tax credit is developed.

2000 – Provincial deductions (“super-deductions”) for SR&ED that exceed the actual amount of the expenditure are deemed to be government assistance and are excluded from the calculation of eligible expenditures for federal SR&ED tax purposes.

2003 – 2008

Summary

This period has characteristically focused on both widening the reach and enhancing the accessibility of the SR&ED tax system. For example, among many similar measures undertaken, the small business limit for a CCPC was raised to $300,000 from $200,000 in 2003 and further raised to $400,000 in 2006. The carry-forward period for the SR&ED tax credit was extended to 20 years in 2006. The period ended with significant administrative changes, including the introduction of the new short form claim (T661). It marked the start of a signifianct review of the programs policies and procedures.

Key Dates

2003 – The small business limit for a CCPC is raised from $200,000 to $300,000 and the tax credit is extended to businesses with taxable incomes ranging from $300,000 to $500,000.

2004 – Unconnected small businesses engaging in SR&ED do not have to share the enhanced 35% tax credit.

2005 – Tax incentives are extended to SR&ED performed in Canada’s Exclusive Economic Zone.

2006 – The small business limit for CCPCs is increased to $400,000 and the $2 million annual SR&ED expenditure limit can be reduced when taxable income for the previous taxation year is between $400,000 and $600,000.  The carry-forward period of the tax credit is extended to 20 years.

2008 – The expenditure limit for CCPCs was increased from $2 million to $3 million and the upper limit for the taxable capital phase‑out range was increased from $15 million to $50 million. The upper limit of the taxable income phase‑out range was increased from $600,000 to $700,000. The SR&ED investment tax credit was extended to salaries and wages for certain activities carried on outside Canada by Canadian‑resident employees, with eligibility limited to a maximum of 10% of the total SR&ED salaries and wages incurred in Canada for the tax year.

2008 also brought administrative changes to the SR&ED Program in the areas of accessibility, predictability, and consistency. The CRA introduced a new short-form SR&ED claim form (T661) and guide (T4088) and developed an on‑line eligibility self‑assessment tool (SALT) to help businesses to determine the eligibility of their projects and to make it easier for businesses to benefit from the SR&ED Program.

2009-2014

Summary

The CRA began a review of the program’s policies and procedures in 2008 to ensure that they were aligned with current business practices and were applied in a consistent manner across the country. In this period, taxpayers adjusted to the new forms, major reports were released, and significant changes were brought in by the government.

Key Dates

2010 – The Minister of National Revenue and Minister of State announced the changes to be implemented following the CRA’s review of the SR&ED program:

• The CRA would begin to report quarterly, through its Web site, on the time it takes to review an SR&ED claim from start to finish.
• CRA officials would be required to spend more time better explaining the SR&ED program requirements, process, and decisions to the claimants and their representatives.
• When, in the course of their review, CRA officials discover that a company has not claimed work that appears to be eligible for the credit, they would now need to inform the claimant of their finding so that companies could  resubmit their claim if within the reporting deadline²

2011 – Following the CRA’s review of the SR&ED program two important reports were published:

On October 17, 2011, Innovation Canada released their Review of Federal Support to Research and Development, in which they proposed the following recommendations to help improve the SR&ED program:

1. Create an Industrial Research and Innovation Council (IRIC), with a clear business innovation mandate (including delivery of business-facing innovation programs, development of a business innovation talent strategy, and other duties over time), and enhance the impact of programs through consolidation and improved whole-of-government evaluation.
2. Simplify the tax credit system used to support small and medium-sized businesses.
3. Make business innovation one of the core objectives of procurement.
4. Transform the institutes of the National Research Council into a series of large-scale, collaborative center’s involving business, universities and the provinces.
5. Help high-growth innovative firms access the risk capital they need through the Business Development Bank of Canada.
6. Establish a clear federal voice for innovation and work with the provinces to improve coordination.³

In December of 2011 the Office of the Taxpayers’ Ombudsman released an observation paper, Issues of Service and Fairness within the Scientific Research and Experimental Development, following their own systemic investigation of the SR&ED program which focused on questions of service, such as the sufficiency and timeliness of the CRA’s communication to claimants, as well as issues of administrative fairness: essentially, whether the CRA is administering the SR&ED program in a manner consistent with the service rights specified in the Taxpayer Bill of Rights. The observations made illustrated the need for the CRA to continue, and even enhance, its proactive communication with SR&ED claimants and their representatives.

2012 – The Canadian government announced multiple large changes to the SR&ED program including:

• capital expenditures would no longer be eligible for SR&ED investment tax credits starting in 2014;
• the rate for calculating the prescribed proxy amount is reduced from 65% to 60% effective January 1, 2013, with a further reduction to 55% effective January 1, 2014;
• only 80% of contract payments can be used for the purposes of calculating SR&ED investment tax credits effective January 1, 2013;
• the general SR&ED investment tax credit is reduced from 20% to 15% effective January 1, 2014; and
• lease costs can no longer be claimed for SR&ED purposes.

In December 2012 the Government of Canada retired the IC 86-4R3, Scientific Research and Experimental Development publication⁴, previously the principal technical guidance document for the SR&ED program.

2013 – The Income Tax Act is modified to introduce a penalty of $1,000 per SR&ED claim if tax preparer information requested on the SR&ED claim form is missing, incomplete, or inaccurate. If a tax preparer participates in the preparation of the claim, the tax preparer will be jointly and severally, or solidarily, liable with the taxpayer for the penalty.

2015-2019

Summary

Many more changes to improve the program occurred in this period, including updating their service standards, adjusting prior year taxable income, etc.

Key Changes

2015 – The Canada Revenue Agency made changes to the following major SR&ED policies in 2015:

On April 21, 2015, the Claim Review Manual (CRM) for Research and Technology Advisors (RTA) was updated. These changes included clarification about agency guidelines regarding compliance approaches, email communications and access to information and privacy (ATIP) in addition to clarifying definitions for “determination”, “conclusion” and “decision”. The document was further revised to include information on risk assessment and review issues in addition to clarifying procedures regarding review plan requirements and approval.

On April 24, 2015, critical changes were made to the Eligibility of Work for SR&ED Investment Tax Credits Policy.

• The term “scientific method” was been removed and the fundamental concept was embodied in the term “systematic investigation or search.”
• The terminology of the use of the five questions to establish if there was SR&ED was changed from an “approach”  to a “method”.
• In addition, question 1 of the five questions was shortened to remove “- an uncertainty that could not be removed by standard practice”, question 3 was modified to remove the term “scientific method”, and question 4 was modified to explicitly allow for advancement not yet achieved.
• The term “technology base or level” was changed to “scientific or technological knowledge base”.
• The term “standard practice” was also removed.

The following forms were adjusted on November 10, 2015, in response to the changes made on the SR&ED eligibility policy:

• T1263 Third-party payments for scientific research and experimental development (SR&ED)
• T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim- Guide to Form T661
• T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim

On August 2, 2016, the CRA introduced the Pre-Claim Review, a free, on-demand review that lets businesses know whether their SR&ED claim will be eligible before it is filed.

The following forms were adjusted on October 26, 2016, in response to the changes made on the SR&ED eligibility policy:

• T1145 Agreement to Allocate Assistance for SR&ED Between Persons Not Dealing at Arm’s Length

• T1146 Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing at Arm’s Length

• T1174 Agreement Between Associated Corporations to Allocate Salary or Wages of Specified Employees for Scientific Research and Experimental Development (SR&ED)

2018- On April 1, 2018, the Canada Revenue Agency (CRA) updated its service standards for processing SR&ED tax credit claims:

What are your thoughts on the history of SR&ED? Have we missed any key milestones? Let us know!