SR&ED tax deductions for research and development
Scientific research and experimental development expenditures
Section 37 allows businesses to deduct expenditures on scientific research and experimental development (SR&ED), and works in conjunction with the Investment Tax Credit (ITC) under s.127 to provide significant tax incentives for R&D.
Plain-language explanation
Section 37 allows a business to deduct expenditures made for "scientific research and experimental development" (SR&ED) performed in Canada. Combined with the investment tax credits (ITC) under s.127, SR&ED is one of Canada's most valuable tax incentives.
What qualifies as SR&ED: Basic research, applied research, or experimental development undertaken for the purpose of achieving technological advancement and creating new knowledge. The key is that there must be a technological uncertainty — work that is not routine or standard engineering.
How the deduction works: SR&ED expenditures may be deducted in full in the year incurred (current expenses), or added to a pool and deducted in future years. Businesses often choose to defer deductions to maximize the value when they have income to offset.
Investment Tax Credits (s.127): After claiming the s.37 deduction, eligible SR&ED spending also earns an ITC. Canadian-controlled private corporations (CCPCs) earn a 35% ITC on the first $3 million of qualifying SR&ED (refundable). Other corporations earn 15% (non-refundable). The ITC reduces your tax payable dollar-for-dollar.
Documentation is critical: CRA rigorously audits SR&ED claims. You need contemporaneous documentation proving: a technological uncertainty existed, hypotheses were formulated, systematic investigation occurred, and results were recorded.
Example
BioTech Inc. (a CCPC) spends $500,000 on SR&ED in 2026. It deducts the full $500,000 under s.37, reducing taxable income by $500,000 (saving approximately $67,500 in corporate tax at 13.5%). It also earns a 35% refundable ITC of $175,000, which is applied against tax payable and the remainder is refunded in cash.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
SR&ED reform reduced the general ITC rate from 20% to 15% and the CCPC enhanced rate from 35% to 35% on first $3M (unchanged). Capital expenditures removed from SR&ED pool. Changes phased in 2013–2014.
Common questions
Can small startups with no taxable income benefit from SR&ED? +
Yes. CCPCs with under $10 million in taxable capital earn a 35% refundable ITC on up to $3 million of qualifying SR&ED. This means even a startup with no taxable income can receive a cash refund from CRA equal to 35% of SR&ED spending.
What documentation does CRA require for SR&ED? +
CRA expects contemporaneous records (written at the time) demonstrating the technological uncertainty, your hypothesis, the systematic investigation process, and results. Project logs, lab notebooks, test records, and technical reports all help. Retroactive reconstruction of records is a major audit risk.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 37. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.