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Solar PV based microgrids supported by other renewable micro-sources like wind energy systems, fuel-cell etc. are playing an important role in the current `state of the art' smart grid architectures. However, there remain certain operational issues, such as the protection system design, which require further investigations and refinement for successful integration of microgrids with smart grid infrastructure. This paper proposes a Controller Area Network (CAN) based smart protection scheme which tracks the dynamic state of the micro-sources based on the measurement of operation critical data and environmental data. The system state is reviewed at regular intervals to estimate the fault level which, in turn, sets the tripping characteristics of the protection relays. The proposed scheme also includes the identification of the type and location of fault which helps in isolating the faulted section and restoration of the healthy section's power. This leads to smart features enabled microgrid operation. All the details of this work are presented.