At the end of the government’s 2023-2024 fiscal year, software development accounted for the largest number of SR&ED claims representing 39.3% of all claims filed. Second to software development was electrical engineering at 15.6%. Clearly, year over year software development has represented a large majority of SR&ED claims submitted.
As we move further into the 2024-2025 fiscal year the software development industry is evolving rapidly, influenced by emerging technologies and shifting business needs. Simultaneously, the SR&ED program continues to play a crucial role in fostering innovation across Canada. Understanding these trends and the SR&ED landscape can help businesses stay competitive and capitalize on available opportunities.
Industry Trends in Software Development
- AI and Machine Learning Integration: Artificial Intelligence (AI) and Machine Learning (ML) are no longer just buzzwords but integral components of software development. Companies are increasingly leveraging AI to enhance user experiences, automate processes, and derive actionable insights from big data. The integration of generative AI models is transforming how software solutions are developed and deployed.
- Cloud-Native Development: The shift towards cloud-native architectures continues to gain momentum. Companies are developing microservices, containers, and serverless computing to achieve greater scalability, flexibility, and efficiency. This approach not only optimizes resource use but also accelerates deployment cycles.
- Cybersecurity Focus: With rising cyber threats, cybersecurity has become a top priority. Developers are emphasizing secure coding practices, adopting robust encryption methods, and implementing advanced threat detection systems to safeguard applications and data.
SR&ED Trends in 2024
The SR&ED program remains a vital tool for companies engaged in R&D activities. In 2024, the program continues to offer significant tax incentives for businesses investing in innovative projects. Here are key aspects to take note:
- Increased Focus on Digital Transformation: The SR&ED program has adapted to reflect the growing emphasis on digital technologies. Projects involving developing new AI, cloud computing, and cybersecurity models, techniques or applications can be eligible for incentives.
- Simplified Application Process: Recent updates from CRA mention their aim to streamline the application process, making it easier for businesses to navigate and access funding. This includes more transparent guidelines and support for claim submissions. CRA has gone through various rounds of consultations with claimants, industry professionals and the like to gain insight on how they can enhance the program. This is not the first or last time CRA has gone through this process. History tells us that while some adjustments may be made, there is always a level of scrutiny that CRA will have to maintain with SR&ED claims to ensure compliance and prevent abuse. So far, we have not seen substantial changes to simplify the process.
- Enhanced Support for Small and Medium Enterprises (SMEs): SMEs are encouraged to leverage the SR&ED program as it offers substantial financial support for innovation. This is crucial for fostering growth and competitiveness in the tech sector. However, there are signs that there are challenges to come for SME’s or first-time claimants to access SR&ED. Recently, it appears CRA has carried out more in-depth reviews of SR&ED tax credit claims particularly under their First Time Claimant Advisory Service (FTCAS). Historically FTCAS reviews were more of an information session where CRA would explain the SR&ED program. Now it appears those selected for a FTCAS can expect a more in-depth review.
- While CRA cannot and does not audit all SR&ED claims, frequent claimants can expect to receive CRA reviews once every 4 years. Further, we’ve consulted with companies recently that have reported their reviews to be much more rigorous than before, diving deeper into why they claimed certain projects and their documentation.
In summary, the software development landscape in 2024 is characterized by advancements in AI, cloud computing, and cybersecurity. Concurrently, the SR&ED program continues to provide valuable support for innovative projects, with CRA seeking to make improvements aimed at making the process more accessible for businesses. However, there is still a clear need for companies to have a strong process in place when claiming SR&ED, including proper time tracking, documentation practices and the ability to understand what SR&ED versus routine R&D is to avoid CRA reviews. Staying informed about these trends and leveraging available resources can position companies for success in a rapidly evolving market.