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More than $3 billion in tax credits are available annually for research and development expenses. Yet more than 85% of companies that qualify are missing out on significant tax credits. Knowing what to look for is key. We identify the innovations, examine every detail and guide you through the entire process so you get the best return.

 

In order to stay ahead of the curve in today’s competitive business landscape, creative change and innovative solutions are key for Canadian organizations. The Scientific Research & Experimental Development (SR&ED) program is the largest single source of federal and provincial government funding for business driven Research & Development (R&D). Do you have the tools and processes in place to create a defensible claim for funding?

Creating a Defensible Scientific Research & Experimental Development (SR&ED) Claim

Article by: Jay McLean | Bio | Contact

Canada’s largest Research and Development (R&D) incentive called the SR&ED tax credit program, administered by the Canadian Revenue Agency (CRA), provides more than $3 billion in tax credits annually for R&D activities conducted in Canada. Still, some Canadian companies conducting eligible R&D are missing out, or struggling with CRA updated program expectations and audit process. Knowing what to look for and how to create a comprehensive, defensible SR&ED claim is key.

What Work Is Eligible?

To qualify for the SR&ED program, systematic investigation in a field of science or technology falling into one of the following categories must take place:

  • Experimental Development: work for the purpose of achieving a technological advancement for the purpose of creating new (or improved) materials, devices, products or processes.
  • Applied research: work that advances scientific knowledge with a specific practical application in mind.
  • Basic research: work that advances scientific knowledge without a specific practical application in mind.

How the CRA Determines If Taxpayers Are Eligible for SR&ED Tax Credits

In April of 2015, the CRA updated the questions they use to determine the eligibility requirements for SR&ED. In order to qualify for SR&ED, your organization must answer “yes” to the following five questions for each claimed project, and show documentation to substantiate:

  1. Was there a scientific or a technological uncertainty that could not be removed by standard practice?

When it is impossible to predict how or whether an objective can be achieved you are left with a level of uncertainty. The baseline level of knowledge that the CRA assumes includes a combination of both public and company specific available information.  

  1. Did the effort involve creating a hypothesis specifically designed to reduce or eliminate the uncertainty?

A hypothesis is a proposed explanation made on the basis of limited evidence as a starting point for further investigation. For the purposes of SR&ED, this simply refers to the means in which a taxpayer will go about resolving the uncertainties which they have identified before the experimentation begins.

  1. Was the method adopted consistent with a systematic investigation? This includes the formulation and testing of hypotheses by experiment or analysis.

The CRA is looking to establish whether the project began with defining a problem and developing a hypothesis, planning and testing of the hypothesis by experiment or analysis, and developing conclusions which address the hypothesis being tested.

  1. Did the process result in a scientific or technological advancement?

Did the work produce information or knowledge discovery that furthers the understanding of scientific relations and /or technological uncertainties. It’s important to keep in mind that this advancement needs to be on a technological level and not a business one. For instance, the advanced understanding cannot be in discovering missed opportunities from a market demand perspective, but rather from a technical stand point. Disproving a study hypothesis would also be regarded as a scientific or technological advancement irrespective of whether the stated project goals or objectives were achieved.

  1. Was a record of the hypothesis tested and results kept as the work progressed?

Thorough, contemporaneous, documentation of the SR&ED work performed needs to be maintained. A claimant is required to demonstrate why eligible claimed expenses are required. Examples of acceptable documentation include: project notes, e-mails, detailed minutes, testing data and following analysis and conclusions, and research agreements. MNP’s dedicated SR&ED team has developed best practices, tools, and templates to assist with this.

Contemporaneous time tracking of labor and materials used by person, project, and activity are also critical pieces of documentation to be maintained.  While timesheets are optimal to support SR&ED-related labour hours, in instances where a claimant has not tracked time, discrete labour allocations may need to be developed.

Helpful Tips to Keep in Mind

The SR&ED program can have a significant impact on your organization’s bottom line while assisting to advance your R&D objectives. Additional considerations to prepare a defensible claim include:

  • Develop and include a dated project record document that contains a record of the advancement / uncertainty being investigated, methodology, and the testing conducted. It is equally important to identify the end of the SR&ED project (i.e. technological uncertainty is resolved or abandoned) as well as the start date.
  • Keep detailed records of due diligence / routine engineering activities attempted to resolve the problem (related expenditures would be excluded from the claim, but would provide evidence that standard practice was insufficient). This could include copies of emails, test results, online searches, patent searches, and / or subject matter expert correspondence.
  • Ideally, contractor invoices should be broken out by eligible activities (eg: design, engineering, testing) and if possible by materials (if contractor purchased materials). General ‘consulting services’ invoices without this kind of breakdown are likely to be challenged and reduced. We also recommend maintaining signed contracts, detailed contractor Statements of Work, and proof of payments.
  • All materials (consumed and transformed) should be kept and not physically removed until after an audit or a CRA Notice of Assessment (NOA) is issued. The claimant should demonstrate that materials consumed have a residual value of less than 10% of the original value (and will not be sold or re-used for non R&D purposes).

As the SR&ED program has evolved the CRA has become more stringent in their assessments of eligibility for the program. MNP’s SR&ED Services team has extensive experience and an in-depth understanding of the SR&ED program. We are prepared to help your organization get the most out of your SR&ED claim!  

For more information, contact Jay McLean, CPA, CMA, P.ENG, MBA, National SR&ED Leader at 519.772.2986 or jay.mclean@mnp.ca

Click here to learn more about MNP’s SR&ED services.

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