SR&ED Credit Is Not Just For Software Companies

Key Takeaways

• The SR&ED tax credit isn't limited to tech companies. Manufacturing, food and beverage, agriculture, engineering, and professional services firms have all qualified.
• The CRA evaluates SR&ED on the nature of the work, not the industry. The key question is whether you faced genuine technical uncertainty and experimented your way through it.
• In an AI-driven world, businesses building internal tools, training custom models, or testing AI-assisted workflows may qualify, even if they don't think of themselves as tech companies.
• For Canadian-controlled private corporations (CCPCs), the federal SR&ED credit is worth up to 35% of qualifying expenditures and is refundable on the first $3 million of spending. For larger or non-Canadian-controlled corporations, the rate is 15%.
• Most provinces have their own SR&ED or innovation tax credits that stack on top of the federal credit. In Ontario, the Ontario Innovation Tax Credit adds up to 8%.

Most small business owners have never looked at the SR&ED tax credit, and most of the ones who have heard of it assume it's only for software companies or biotech labs.

That's not always the case.

The Scientific Research and Experimental Development (SR&ED) program was designed to reward businesses doing technical work to develop or improve a product, process, formula, software, or technique, regardless of industry. What matters is whether you were trying to solve a technical problem through a process of systematic investigation.

What Qualifies: The CRA's Three-Part Test

To claim the SR&ED credit, each activity you count needs to satisfy three criteria.

If your activity passes all three parts, the money you spent on it, including wages, materials, and certain contractor costs, may count as a qualifying SR&ED expenditure.

Industries That Qualify Beyond Software

The list of industries that have successfully claimed the SR&ED credit is longer than most people realize.

Manufacturing: Developing new production processes, testing new materials, or designing custom tooling. If your engineers spent time figuring out how to make something work better or cost less to produce, that work may qualify.

Food and beverage: Improving shelf life, developing new recipes, or testing new packaging that extends product quality. The work has to involve technical uncertainty, not just culinary creativity, but many food producers are surprised to learn their product development teams may qualify.

Architecture and engineering: Energy-efficient structural designs, load-bearing innovations, new building systems. If you're solving a problem that wasn't solved before and testing your way to the answer, you may be in range.

Agriculture: New growing techniques, crop yield improvements, precision irrigation systems. Agricultural SR&ED is an underused area of the program.

Professional services: If your firm built custom software internally, developed AI-assisted workflows, or created proprietary tools, that development work may qualify, even if your core business has nothing to do with technology.

The AI Angle

This is where it gets relevant for 2024 and beyond. A lot of businesses are actively building things with AI right now: training custom models, integrating AI into internal processes, or developing AI-assisted tools for their teams. Most of them don't think of that as research and development.

The CRA test doesn't ask whether you're a tech company. It asks whether you were dealing with technical uncertainty and experimenting your way toward a solution. Building a custom AI tool that automates part of your operations may qualify. Testing whether a model handles your use case well may qualify. Running trials to figure out the right integration may qualify.

That said, not every AI-related project qualifies. Routine implementation, simple prompt use, or off-the-shelf software configuration usually won't be enough on its own.

If your business has spent time and money developing or testing AI-assisted workflows in the last three years, it's worth having your Mesa CPA advisor look at those expenses.

What the Credit Is Worth

For Canadian-controlled private corporations (CCPCs), the federal SR&ED credit rate is 35% on the first $3 million of qualified SR&ED expenditures. This portion of the credit is refundable, meaning you receive it as a cash payment even if your corporation owes no income tax. Expenditures above $3 million are eligible for a 15% non-refundable credit.

The 35% enhanced rate begins to phase out when your corporation's taxable capital exceeds $10 million and is eliminated at $50 million of taxable capital.

For non-CCPCs (public companies or foreign-controlled corporations), the federal rate is 15%, non-refundable.

What This Looks Like: Marco's Metal Fabrication in Hamilton, Ontario

Marco runs a metal fabrication business in Hamilton with 18 employees and about $3.2 million in annual revenue. Two years ago, his team spent eight months developing a new heat treatment process for a custom part they were building for an industrial client. The existing methods weren't producing consistent results at the tolerances the client needed. Marco's engineers ran dozens of tests, adjusted variables, and eventually landed on a process that worked.

That eight months of engineering labor, along with the materials used during testing, may qualify as SR&ED activity. Marco's Mesa CPA advisor calculated $180,000 in qualifying SR&ED expenditures for that year. At the CCPC rate of 35%, that produced a federal investment tax credit of $63,000, refundable in cash.

Marco didn't think of his shop as a research business. But the CRA's three-part test doesn't care what you call yourself. It cares what you did.

Provincial Programs

Most provinces offer their own SR&ED or innovation tax credits on top of the federal program. These stack, meaning you can claim both.

Ontario: The Ontario Innovation Tax Credit (OITC) provides an 8% refundable credit on eligible SR&ED expenditures incurred in Ontario. For smaller corporations, this adds meaningfully to the federal credit.

Quebec: Quebec has its own SR&ED tax credit administered by Revenu Quebec, with rates ranging from 14% to 30% depending on company size and type of research. Quebec companies can stack both provincial and federal credits.

British Columbia: BC offers the Scientific Research and Experimental Development Tax Credit at 10% for eligible expenditures, though carryforward rules and eligibility criteria apply.

Alberta: Alberta does not currently offer a provincial SR&ED credit, but Alberta businesses still benefit from the federal program.

Why This Matters

The SR&ED program has existed since 1986. For most of that time, it was treated as a large-company benefit, because claiming it used to require expensive documentation and legal work that small businesses couldn't justify. CRA guidance and simplified filing processes have made it more accessible for smaller operations.

The businesses most likely leaving money on the table are the ones in traditional industries who never thought to ask. A manufacturer who spent a quarter developing a new production method. A food producer who spent months reformulating a product. A professional services firm that built custom software for internal use. None of them think of themselves as doing R&D. Some of them may still qualify.

The other group is newer businesses building with AI. The tools are new, the applications are new, and the technical uncertainty can be real.

If your business has done any of this work in the last three years, the credits are worth calculating. Amended corporate tax returns are generally allowed for up to three years back, so even if you missed prior years, there may still be time to claim.

If you think your business might qualify and want to know what the numbers look like, your Mesa CPA advisor can help you figure out whether your expenses qualify and how much the credit is worth.

Frequently Asked Questions

Can I claim the SR&ED credit if my business isn't profitable yet?

Yes. For CCPCs, the 35% credit on the first $3 million of qualifying expenditures is refundable. That means you receive it as a cash payment from the CRA even if your corporation has no tax owing. This makes SR&ED particularly valuable for early-stage businesses doing qualifying work.

What records do I need to keep?

You'll need documentation that shows what the activity was, who worked on it, how much time they spent, and what the goal was. Project logs, timesheets, test notes, and records made at the time of the work are stronger than records reconstructed after the fact. The CRA expects you to show what technical problem you were trying to solve and what you tried.

Does the work have to succeed to qualify?

No. The credit is based on the process of systematic investigation, not the outcome. If you ran experiments, tested alternatives, or attempted to resolve a technical uncertainty and it didn't work, that activity can still qualify. Failed SR&ED may still be SR&ED.

Can I claim expenses for contractor work?

Yes, but at a reduced rate. Generally, 80% of amounts paid to arm's length contractors for qualified SR&ED may be included as qualifying expenditures, provided the work meets the eligibility criteria and the contractor relationship gives the taxpayer the necessary rights. Non-arm's length contractor costs follow different rules.

How far back can I go?

You can generally file amended T2 corporate tax returns to claim SR&ED credits for up to three prior years, subject to the normal statute of limitations. If your business has been doing qualifying work and hasn't claimed the credit, ask your Mesa CPA advisor whether an amended return makes sense.