Claiming SR&ED Tax Credits: R&D Incentives for Innovative Businesses – A Complete Guide by a Montreal CPA Firm Near You

The Scientific Research & Experimental Development (SR&ED) program is the most
generous research and innovation tax incentive in Canada, offering refundable and non-
refundable credits to businesses developing new products, processes, technologies,
materials, or scientific knowledge. Whether you are a startup, a manufacturing
company, a software developer, an engineering firm, or a biotech researcher, SR&ED
tax credits can significantly reduce your corporate tax bill—or generate cash refunds
even when your business is not profitable. Yet the SR&ED program is one of the most
misunderstood and heavily scrutinized areas of corporate taxation. CRA’s eligibility tests
are technical and strict, documentation requirements are demanding, and poorly
prepared claims often lead to reviews, denials, or reduced credits. Understanding how
to claim SR&ED tax credits in Canada is essential for maximizing refunds and
protecting innovation investments.

Legal and Regulatory Framework
The SR&ED program is governed by section 37 and section 127 of the Income Tax Act
and is supported by detailed CRA policy documents. SR&ED credits are available to
corporations, partnerships, and proprietorships that undertake qualifying work. To
qualify, a project must meet CRA’s three eligibility criteria:

1. Scientific or technological uncertainty – a problem that could not be solved
   using existing standard practices or established knowledge.

2. Scientific or technological advancement – an attempt to generate new
   knowledge or improve understanding beyond current capabilities.

3. Systematic investigation – evidence of a structured approach, including
   hypotheses, experiments, testing, analysis, and documentation.
   Eligible SR&ED expenditures include:
   • salaries and wages of employees directly involved
   • contractor payments for eligible work
   • materials consumed or transformed
   • overhead (traditional or proxy method)
   • certain third-party payments
   • payments to Canadian research institutions
   CCPCs may receive a 35% refundable SR&ED credit on eligible expenditures up to a
   limit, and a 15% non-refundable federal credit beyond that. Provincial credits may
   apply as well. These rules form the backbone of the SR&ED tax credit system in
   Canada.
   Key Court Decisions
   Several court decisions illustrate how CRA and courts interpret SR&ED eligibility.
   In Northwest Hydraulic Consultants Ltd. v. Canada, the Tax Court established
   foundational tests for scientific advancement, technological uncertainty, and systematic
   investigation—standards still used today.
   In Zeuter Development Corp. v. The Queen, CRA denied SR&ED claims because the
   taxpayer failed to document hypotheses or experiments; the court upheld the denial,
   emphasizing the need for evidence.
   In Formadrain Inc. v. Canada, the court ruled in favour of the taxpayer because the
   company demonstrated experimental development despite failing prototypes, proving
   that failed attempts can still qualify.

In Precast Concrete v. Canada, the court rejected a claim where improvements were
considered routine engineering rather than technological innovation.
These cases demonstrate that clear scientific objectives, detailed records, and
systematic experimentation are essential when claiming SR&ED tax credits in Canada.
Why CRA Targets This Issue
CRA devotes significant audit resources to SR&ED because the program is large,
complex, and frequently misunderstood. CRA flags claims when:
• descriptions appear vague, non-technical, or too commercial
• claimed work resembles routine engineering, debugging, or maintenance
• documentation is incomplete or created after the fact
• subcontractor invoices lack proof of eligible work
• project timelines are inconsistent with claimed labour hours
• companies attempt to maximize SR&ED without meeting scientific criteria
CRA reviews both the technical narrative and the financial documentation, often
requesting interviews with project managers, engineers, developers, or researchers.
Understanding CRA’s expectations is crucial for avoiding denials.
Mackisen Strategy
At Mackisen CPA Montreal, we help innovative companies prepare accurate,
defensible, and optimized SR&ED claims. Our SR&ED strategy includes:
• analyzing ongoing projects to determine SR&ED eligibility
• preparing a compliant technical narrative that demonstrates uncertainty,
advancement, and systematic investigation
• documenting hypotheses, experiments, iterations, prototypes, failures, and technical
challenges
• preparing detailed labour breakdowns, time tracking, and employee eligibility
• reviewing subcontractor invoices for SR&ED-compliant descriptions
• determining whether the traditional method or proxy method yields higher SR&ED
credits
• coordinating combined federal and provincial SR&ED filings
• defending clients during CRA technical review meetings or financial audits
• building year-round documentation systems to strengthen future claims
Our structured and scientific approach ensures maximum SR&ED credit recovery with
minimal CRA risk.
Real Client Experience

A software company attempted to claim SR&ED but focused its narrative on business
improvements rather than technical uncertainties. CRA denied the claim. We rebuilt the
technical description, highlighting algorithmic challenges and failed iterations, and
successfully recovered most of the credits on appeal.
A manufacturing firm lacked documentation for experiments performed during new
equipment development. We reconstructed detailed technical logs and ensured future
compliance, resulting in a substantial refundable credit.
A biotech startup had significant eligible research expenditures but filed incorrectly
under the traditional method. We recalculated using the proxy method, increasing their
refundable SR&ED credit dramatically.
These cases illustrate the importance of technical precision and CRA-aligned
documentation when claiming SR&ED tax credits in Canada.
Common Questions
Businesses often ask whether failed projects qualify. Yes—failed experiments often
strengthen SR&ED eligibility.
Others ask whether routine software debugging qualifies. No, unless it resolves
technological uncertainty.
Some ask if prototypes qualify. Yes—prototypes used to test hypotheses are eligible.
Another question: Does SR&ED cover foreign contractors? Generally no—only
Canadian-based labour counts for refundable credits.
These questions highlight why SR&ED rules require deep technical understanding and
precise documentation.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
innovative businesses recover thousands—sometimes millions—in refundable SR&ED
tax credits. Whether you are filing your first claim, strengthening documentation, or
defending a CRA review, our expert team ensures precision, transparency, and
protection from audit risk.