To qualify for Research and Development Tax Credits (R&D tax credits), the work a company performs "must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel" (Canada Revenue Agency).
Work that qualifies for Research and Development Tax Credits includes experimental development, applied research, basic research and support work. You can read details about the kind of work that qualifies for R&D Tax Credits on the Canada Revenue Agency website.
The biggest misconception about Research and Development Tax Credits, in my opinion, is that only corporations can claim them which is absolutely not true; Canadian sole proprietorships and partnerships are just as capable of doing research and development and applying for Research and Development Tax Credits and Refunds. See Don't Miss Out on the Research and Development Tax Credit Program.
Generally, though, Canadian-controlled private corporations (CCPCs) get the most benefit from research and development tax-wise, as they get the biggest tax credits when they engage in R&D. (Types of Corporations in Canada and Corporate Tax explains the different types of Canadian corporations and how they are taxed.)
"Generally, a Canadian-controlled private corporation (CCPC) can earn an investment tax credit (ITC) of 35% up to the first $3 million of qualified expenditures for (Research and Development) carried out in Canada, and 20% on any excess amount. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an Investment Tax Credit of 20% of qualified expenditures for R&D carried out in Canada."
"And Canadian-controlled private corporations with a taxable income in the immediately preceding year that does not exceed the business limit may receive a portion of the Investment Tax Credit earned as a refund, after applying these tax credits against taxes payable."
"Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC of 20% of qualified expenditures for (Research and Development) carried out in Canada" (Canada Revenue Agency).
The business limit or expenditure limit is $3 million. It begins to decrease when the taxable income of the CCPC and its associated corporations for the previous tax year exceeds $500,000 and becomes nil at $800,000 ($400,000 and $700,000 respectively for tax years before 2010).
To claim Research and Development Tax Credits on qualified R&D expenditures, you need to file Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim along with Schedule 31.
If you want to get involved in Research and Development but are having trouble getting started, How to Identify SR&ED-Eligible Projects can help you find a starting point.
