Am I Too Early for SR&ED? A Founder’s Guide to Timing Your First Claim

The Short Answer

You’re not “too early” for SR&ED simply because of your company’s age, revenue, or funding status. SR&ED eligibility is based on two things: technical eligibility and financial eligibility. Firstly, whether your team is doing technical work that involves genuine scientific or technological uncertainty, as defined by the CRA’s SR&ED program. Secondly, the real question isn’t “am I too early,” it’s “do I have enough eligible technical spend to make a claim worthwhile?”

The best way to know for sure is a quick conversation. This blog will cover the basics of how to know if you should be applying for SR&ED, but every company is unique, and your situation likely warrants a specific conversation about your details. We talk to founders at every stage, and there’s genuinely no such thing as too early to start understanding and strategizing around SR&ED. Beyond reading this “too early for SR&ED?” guide, a free 30-minute SR&ED consultation is the fastest way to get clarity on your exact position. 

Generally, if you are working on solving challenging technical problems and you are paying technical team members or consultants in Canada, you should be thinking about SR&ED. Let’s dive into the details. 

Technical SR&ED Eligibility

The CRA doesn’t ask how old your company is or how much revenue you’ve booked. To determine SR&ED eligibility, the CRA asks three things about the work itself, laid out in the CRA’s eligibility guidelines:

• Technological uncertainty. Did you face a problem where the outcome or solution wasn’t knowable in advance, even to someone experienced in the field?
• Systematic investigation. Did you form a hypothesis, test it, and iterate based on results, rather than just try something once and move on?
• Technological advancement. Did the work generate new knowledge or capability, even if the end product wasn’t a commercial success?

If your team can answer yes to these, the stage of the company is almost irrelevant. A two-month-old startup and a ten-year-old company are evaluated by the exact same criteria. For a deeper look at where the line actually sits, see our breakdown of R&D vs. SR&ED and why not all R&D qualifies.

We have several clients who got hung up here; they figured because they are new and just starting to build their product, that they wouldn’t meet the technical requirements of SR&ED. That is often the opposite of the truth; in many cases, the work companies do in the early days to iterate, experiment, and problem solve to get to their beta solution is very SR&ED eligible and can result in significant SR&ED claims. 

The Financial Reality: It’s Not About Stage, It’s About Spend

Once you’ve confirmed that your work actually meets the technical criteria for SR&ED, which is the more important part of the application process, you must then consider the financial component. There are many cases where a company meets the technical criteria, is doing very innovative work, but they don’t yet have expenses and therefore cannot apply for SR&ED. 

Since SR&ED is a tax credit, it operates as an after-the-fact refund for expenses, so to be eligible, the company must have sufficient expenses in the previous fiscal year to warrant the SR&ED application. 

In practice, that means you need one or more of:

• Technical employees on payroll doing the eligible work
• Contractors performing eligible technical work
• Materials consumed or transformed during experimentation
• Certain capital or overhead costs tied to the work

No technical spend = no expenditure base = no SR&ED tax credits, regardless of how novel the underlying problem is. Another thing to note is all employees and contractors must be in Canada to be eligible. 

This is why we generally tell early-stage companies: If your estimated refund is going to come in under roughly $20,000, it usually isn’t worth the time and cost of preparing a claim. Below that threshold, the admin burden tends to outweigh the benefit. 

What does a ~$20K refund typically take? A few rough scenarios to make this concrete:

• One technical hire. A single full-time technical team member (developer, engineer, etc.) earning around $40,000 to $50,000 a year, with a meaningful portion (70%+) of their time spent on eligible experimentation, can land a claim in this range on their own.
• A small team, partial allocation. A founder and one or two developers with combined salaries of $60,000 to $80,000, where only a portion of that time is actually SR&ED-eligible (not all coding is eligible, only the experimental portion), can also land around this mark.
• Contractor-heavy teams. A handful of technical contractors billing a combined $50,000 to $70,000 for eligible work over the fiscal year can produce a similar estimate, depending on their eligible time allocation.
• Materials or prototyping-heavy work. Hardware, cleantech, or manufacturing companies with significant material or prototype costs can hit the threshold with less payroll spend, since materials count too at a rate of ~40%. $40,000-$60,000 in material or capital costs can lead to a decent-sized SR&ED claim. 

When the claim is much less than $20,000, with the consulting fees, the refund may not be worth the effort. Granted, it’s up to the company to decide if it is worthwhile, and in some cases even $10,000 is a significant amount for a company. We are always happy to help. 

The best thing to do is look at our SR&ED calculator (GrowWise SR&ED Calculator) to better understand your anticipated SR&ED refund. It takes your eligible salaries, contractor costs, and materials and gives you a real estimate of your federal and provincial refund in a couple of minutes. Or, have a conversation with our team to estimate your SR&ED claim with more detail; book here: