Scientific Research and Experimental Development is Canada's largest federal R&D tax incentive program. The Canada Revenue Agency administers it and pays out billions of dollars every year to companies that carry out qualifying experimental work in Canada. Credits come in two flavours: a refundable credit that pays cash back to Canadian-Controlled Private Corporations, and a non-refundable credit that reduces taxes owed for other filers. Salaries, contractor costs, and materials consumed during the R&D work are the main eligible expenditures.
The Canada Revenue Agency is the federal tax authority responsible for administering the SR&ED program. It reviews technical narratives and financial submissions, decides whether the work qualifies, issues refunds on approved claims, and audits filings when it needs to verify the underlying work. Most SR&ED interactions run through a CRA coordinating tax services office and, for technical questions, a Research and Technology Advisor.
The Investment Tax Credit is the actual credit a company earns on its eligible SR&ED expenditures. For a Canadian-Controlled Private Corporation, the federal rate is 35% on the first $3 million of qualifying spend and is fully refundable, meaning the CRA writes a cheque even if no tax is owed. Above the $3 million threshold, and for non-CCPCs, the federal rate drops to 15% and is only used to reduce taxes payable. Most provinces layer their own ITC on top, which pushes the effective combined rate well past 40% for many claimants.
A Canadian-Controlled Private Corporation is a private corporation resident in Canada that is not controlled, directly or indirectly, by non-residents or by one or more public companies. CCPC status matters because it unlocks the fully refundable 35% federal SR&ED rate, the small business deduction, and several other tax preferences. Losing CCPC status, often through a foreign investment round, can materially reduce the value of a SR&ED claim.
Form T661 is the CRA form used to file a SR&ED claim. It captures a plain-language technical narrative for every project, a detailed breakdown of eligible expenditures, and the elections a claimant is making, such as the proxy method for overhead. The form is filed together with the corporate T2 return and, for most claimants, with Schedule T2SCH31 to calculate the resulting investment tax credit.
A refundable tax credit is one the CRA pays out in cash even when the company owes no tax. For a Canadian-Controlled Private Corporation, the enhanced 35% federal SR&ED rate on the first $3 million of qualifying spend is fully refundable, which is what turns SR&ED into a working-capital tool for early-stage companies rather than just a tax shelter.
A non-refundable tax credit can only be used to reduce taxes payable and is never paid out in cash. Public companies, foreign-controlled corporations, and CCPCs on expenditures above the $3 million enhanced-rate threshold earn SR&ED credits at the 15% federal non-refundable rate. Unused amounts can generally be carried back three years or forward twenty.
A SR&ED refund advance is a short-term loan secured against a company's expected SR&ED refund. Grow Financial typically advances 75% to 100% of the estimated refund once the claim has been filed, and the loan is repaid directly from the CRA cheque when it arrives. The structure is non-dilutive: no equity changes hands, no warrants are issued, and the founders keep full ownership.
SR&ED financing is the umbrella term for any debt product secured by SR&ED tax credits. It covers refund advances against already-filed claims, accrual financing against R&D work still in progress, and multi-year facilities that pull forward several future claims. All of it is repaid from CRA refunds rather than from operating cash flow, which is what makes it a natural fit for cash-hungry R&D companies.
Accrual financing advances funds against SR&ED work performed in the current fiscal year, before the claim is filed with the CRA. Because the credit has not yet been reviewed and could be adjusted, lenders take more risk than they do on a post-filing advance. Advance rates therefore sit lower, typically in the 60% to 90% range of the projected credit, and pricing is a little higher. Founders use it to convert this year's R&D spend into cash instead of waiting until the year closes.
Non-dilutive funding is any capital raised without giving up ownership or issuing new shares. Grants, refundable tax credits, revenue-based financing, and SR&ED advances all fit the definition. Because the cap table stays intact, non-dilutive capital is usually the cheapest money a founder can raise on a fully diluted basis, and it keeps future equity rounds cleaner.
Dilutive funding is capital raised by issuing new shares, including venture capital, angel investment, and equity crowdfunding. Each new share reduces the percentage ownership of existing shareholders, which is the cost founders pay for the capital. Convertible instruments such as SAFEs and convertible notes are dilutive as well, but the dilution only shows up when they convert into equity at a later round.
Runway is the number of months a company can keep operating at its current burn rate before it runs out of cash. Founders track it closely because it defines how much time they have to hit the next milestone, close the next round, or reach profitability. A SR&ED advance extends runway without touching the cap table by pulling forward cash the CRA already owes the business.
Burn rate is how much cash a company spends each month. Gross burn is the total monthly outflow across payroll, rent, software, and everything else. Net burn subtracts monthly revenue and measures the actual drawdown on the bank balance. Investors and lenders both look at net burn because it is the number that determines runway.
Eligible SR&ED expenditures are the costs the CRA allows a claimant to include in a SR&ED claim. The main categories are salaries and wages for staff directly engaged in the R&D work, payments to arm's-length Canadian contractors, materials consumed or transformed during experimentation, and, if the proxy method is elected, a deemed overhead allowance equal to 55% of eligible salaries.
The proxy method is the simpler of the two ways to claim overhead on SR&ED. Instead of tracking actual rent, utilities, and support costs, the claimant adds a deemed overhead allowance equal to 55% of eligible salaries. It is a one-line election on Form T661, cuts down on paperwork, and is the option most claimants pick.
The traditional method is the alternative to the proxy election. Instead of a fixed 55% uplift, the claimant identifies and allocates real overhead costs such as rent, utilities, insurance, and shared support staff to the SR&ED work. It requires more record-keeping, but for operations with heavy fixed costs and a large R&D footprint, it can produce a bigger claim than the proxy method.
A contract expenditure is a payment to an arm's-length Canadian contractor who performs SR&ED work on the claimant's behalf. The CRA allows 80% of the invoiced amount to be included as a qualifying expenditure, provided the contractor is a Canadian resident and the work is carried out in Canada. Amounts paid to non-arm's-length parties follow different rules.
The technical narrative is the written project description submitted in Part 2 of Form T661. Each project answers three questions in plain language: what scientific or technological uncertainty was being resolved, what systematic work was performed to resolve it, and what technological advancement was sought. The CRA caps the response at 1,400 words per project, and the quality of these narratives is usually the single biggest factor in how a claim is received on review.
Technological uncertainty is one of the three CRA tests for SR&ED eligibility. It exists when a competent professional in the field cannot readily deduce whether a given result is achievable, or how to achieve it, using standard practice and publicly available knowledge. If the answer could be found by looking it up or by routine engineering, the work does not clear this bar.
Technological advancement is the second of the three CRA tests for SR&ED eligibility. The work must aim to generate new knowledge that pushes the underlying technology beyond its existing base. What matters is the attempt to advance, not the outcome: a project that fails to reach its goal can still qualify as long as it was genuinely trying to extend what is known in the field.
Systematic investigation is the third of the three CRA tests for SR&ED eligibility. The work has to follow a disciplined process: form a hypothesis, design and run experiments, observe the results, and iterate based on what was learned. Contemporaneous documentation such as design notes, test plans, and change logs is what proves the process was actually followed. Routine debugging and configuration do not qualify.
The First-Time Claimant Advisory Service is a free CRA program for companies filing their first SR&ED claim. A CRA reviewer meets with the team, either on site or virtually, to walk through eligibility rules, documentation expectations, and the pitfalls that most often trip up new claimants. The visit is educational and does not include any assessment of the claim itself.
A SR&ED review is a CRA examination of a filed claim. It can be limited to the financial side (a financial review), to the technical side (a technical review by a Research and Technology Advisor), or cover both at once. Reviews are typically triggered by a first-time filing, a large year-over-year change, or specific risk indicators. Well-organized supporting documentation is what usually determines how quickly and cleanly a review closes.
The Notice of Assessment is the CRA document that confirms a corporate tax return, including any SR&ED claim it contained, has been assessed. The refundable portion of the SR&ED credit is paid out at the same time the notice is issued, either as a direct deposit or as a cheque. Any adjustments the CRA has made to the claim are also spelled out in the notice.
A SR&ED claim must be filed within 18 months of the end of the fiscal year in which the R&D work was performed. The deadline is statutory, and the CRA does not accept late filings under any circumstance. Missing it by a single day means the entire year's credit is forfeited, which is why most claimants aim to file well ahead of the cut-off.
Effective APR is the all-in annualized cost of a SR&ED advance. It rolls interest, origination fees, monthly service fees, and any flat charges into a single annual rate so that offers from different lenders can be compared on the same basis. Because SR&ED advances are short-dated, headline monthly rates can look low while effective APRs run materially higher, so it is the number worth benchmarking.
Advance rate is the share of an expected SR&ED refund that a lender is willing to fund up front. For a claim that has already been filed with the CRA, rates typically run between 75% and 100% of the expected refund. For accrual financing against work still in progress, rates sit lower, usually between 60% and 90%, because the credit has not yet been reviewed and the lender is carrying more risk.
The Industrial Research Assistance Program is a National Research Council program that provides non-dilutive grants and hands-on advisory support to Canadian small and medium-sized businesses performing R&D. It complements SR&ED rather than duplicating it: an Industrial Technology Advisor works directly with the company, and funded amounts reduce the pool of SR&ED-eligible expenditures for the same work.
Grant funding is non-repayable capital awarded by a government agency or foundation for a defined project or outcome. Grants do not have to be paid back, but when they support work that is also SR&ED-eligible, they reduce the qualifying expenditure pool on a dollar-for-dollar basis. Careful stacking of grants and SR&ED is one of the highest-leverage things a Canadian R&D company can do.
A convertible note is a short-term debt instrument that converts into equity at a future priced financing round, usually at a discount or subject to a valuation cap. It is dilutive on conversion, and the eventual dilution can be difficult to model in advance. SR&ED advances are often preferred over convertibles for bridging cash needs because they never touch the cap table.
A Simple Agreement for Future Equity, or SAFE, is an instrument first published by Y Combinator that converts into equity when a future priced round closes. Unlike a convertible note, a SAFE is not debt, carries no interest, and has no maturity date, which makes it lighter to close but no less dilutive when it eventually converts.
Venture debt is a term loan extended to venture-backed startups, typically alongside or shortly after an equity round. Lenders usually attach warrants to the loan as an equity kicker, which makes venture debt partially dilutive. SR&ED financing sits alongside venture debt in a founder's toolkit but stays fully non-dilutive because it is secured by a receivable from the CRA rather than by the equity of the business.