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What counts as scientific or experimental development under SR&ED 🔍
The Canada Revenue Agency defines scientific research and experimental development as any work undertaken to advance technology through systematic investigation. The real test for startups is whether their work goes beyond simply applying existing tools or knowledge. Improving an AI model's precision using known methods wouldn't qualify, but developing a new training algorithm because existing ones couldn't handle your data complexity, probably would.
Founders often underestimate how broad SR&ED eligibility is. You don't need a lab or a PhD; what matters is the technological uncertainty you faced and the methodical way you attempted to overcome it. A SaaS team optimizing its real-time data engine or an agritech startup testing new sensor calibration processes can both qualify.
As detailed in SR&ED Tax Credits: Maximizing Returns on R&D Investments, the program is designed to fuel progress across industries. When in doubt, apply a simple test: were you trying to discover something that wasn't already known in your field?
How to prove technological uncertainty and systematic investigation 🧬
The CRA looks for two pillars in every SR&ED claim: uncertainty and systematic investigation. Uncertainty means you couldn't predict the outcome using existing science or technology. Systematic investigation means your approach was structured, you formed a hypothesis, executed controlled tests, and recorded results.
A failed experiment can still be eligible, as long as it was conducted within the scope of your claim. The CRA rewards learning through testing, not success through luck. This is where most startups stumble. They innovate rapidly but fail to document the steps. If your technical team experiments daily, create an internal process to capture what's being tested and why. Even short Slack summaries or version control notes can become valuable evidence during a review.
Simple documentation practices such as technical meeting notes, sprint retrospectives, and annotated code commits all serve as evidence. The goal is to create a timeline showing how your team methodically approached solving an uncertain problem. Founders who treat R&D as both discovery and documentation maximize their credits. As Thomas Edison said, "I have not failed. I've just found 10,000 ways that won't work." In SR&ED terms, that persistence, backed by written evidence, is gold.
Eligible expenditures founders often overlook in SR&ED claims 💵
Beyond direct labour, many costs are eligible but frequently ignored. Salaries for developers, engineers, or technical leads who perform, supervise, or directly support experimental work can be claimed. The list goes on, including consumables, prototype materials, and certain overhead expenses related to R&D. Even cloud computing and data processing costs qualify when used specifically for SR&ED projects.
The biggest mistake? Underreporting time. Technical founders rarely log their own R&D hours and leave money on the table. Implementing lightweight time-tracking, even a recurring calendar entry or annotated sprint record, can turn unclaimed hours into recoverable tax credits. Many startups also forget that contract work can be eligible under the 80% rule, meaning external developers or researchers performing SR&ED-eligible work in Canada can represent 80% claimable costs.
Another overlooked category involves materials consumed during experimentation. Physical prototypes, hardware configurations, or manufacturing process iterations often qualify when tied directly to experimental work. Through EIM's Fractional CFO services, founders can align cost tracking with CRA requirements. Proper bookkeeping services ensure every eligible dollar is captured from the start.
Building audit-proof documentation that survives CRA review 🗂️
When CRA auditors evaluate a claim, they look for clarity, continuity, and credibility. Your documentation should tell a logical story: the problem you faced, the hypothesis you tested, the experiments you ran, and what you learned.
Strong documentation follows three essential principles. First, every R&D task should be traceable to a specific project objective, showing what problem you were solving and why existing solutions can’t solve it. Second, every claimed cost must connect to a particular technical uncertainty, demonstrating how each dollar contributed to resolving an unknown challenge. Third, every experiment should leave a digital paper trail through Git commits, test results, technical notes, or prototype photos that demonstrate your systematic approach.
The difference between a smooth CRA review and a prolonged audit often comes down to documentation habits established early. Startups that treat documentation as part of their innovation cycle rarely face SR&ED pushback. Weekly technical standups noting experiments in progress, version control messages referencing specific challenges, and internal wikis documenting what worked and what didn't all became invaluable during claim preparation.
EIM's cloud accounting solutions can integrate real-time tracking with your financial reporting tools, creating a continuous record that makes SR&ED claims both more accurate and less time-consuming. Audit-proofing your claim isn't about writing more; it's about writing right. The CRA doesn't expect perfection, just consistent, transparent evidence of how your team pushed technological boundaries.
Ready to make your next claim both compliant and compelling? Book a free consultation.
Natasha Galitsyna
Co-founder & Creator of Possibilities
Serving the startup community since 2018
EIM "EIM Services" has partnered with multiple Canadian and International startups to deliver scalable, cost-effective, and solid solutions. Our expertise spans pre-seed to Series A companies, delivering automated financial systems that reduce financial overhead by an average of 50% while ensuring investor-grade reporting at a fraction of the cost of an in-house team. We've helped startups save thousands through strategic financial positioning and compliance excellence.
