R&D requires significant capital, manpower, and time investment that may have been used for other projects with a bigger probability of resulting in a profit.
Many companies are therefore hesitant to do research and development due to the inherent risk that the innovation will not be successful. The Canadian Revenue Authority (CRA) has introduced its SR&ED (Scientific Research and Experimental Development Programme) to alleviate those concerns.
The CRA funds eligible SR&ED projects generously by subsidizing some of the costs related to technological and scientific discoveries. It is crucial to understand that tax refunds and credits are granted for expenditures that are SR&ED eligible, regardless of the project’s success or failure.
Even if the SR&ED project does not prove the hypothesis proposed, it may still make a crucial contribution to the overall R&D efforts. Failed SR&ED projects in fact often provide new insight and information that then serve to support further development.
New Knowledge is Gained via A Systematic Approach
The CRA stipulates that SR&ED is entitled to claim expenses that have been incurred during systematic searches and investigations. By insisting that a systematic approach be used, the CRA avoids subsidising efforts that are purely based on trial and error.
The agency fully understands and supports the mantra of "trying until you get it right," and as such does not object to the fundamental concept of trial and error. This is partly why they allow funding for SR&ED projects that have failed. They are however very specific in their definition that "trial and error" means "experiments that are undertaken by an organization to prove hypotheses."
If you ran an experiment for a month and changed a specific element each day, you won’t be able to tell whether the change didn’t lead to the expected result or whether the original assumptions about the result were incorrect.
If an experiment is conducted with a systematic approach instead, the researchers will understand exactly why their efforts did not produce the results expected. If they then continue using a systematic approach and gain new knowledge from the results, there are ultimately no failures. If you understand this, it will add tremendous value to the company's future R&D work and assist other researchers in avoiding making the same mistakes.
Due Diligence Is Crucial When Developing SR&ED Projects
Any company should take significant steps to identify and disqualify existing technologies and solutions that justify their expenditures. Expenditure is only eligible if it is devoted to solving scientific and technological uncertainties. This means that SR&ED projects should always perform due diligence to ensure that the issues that are at stake are real. Before conducting research, companies have to develop and clarify real questions.
Doing due diligence demonstrates that the company is taking the required systematic approach that values technological and scientific discoveries in general. Expressing problems within an organization paves the way for future research, even though the problem may be that your work hasn’t resulted in the expected results.
If we examine the long history of technological and scientific innovation, it is very easy to find numerous challenges that have been undertaken and resulted in different degrees of failure along the way, thereby ultimately leading to successful progress. The many examples include the camera, the light bulb, and more recently, the ongoing development of COVID-19 vaccines. Learning from failed trials is not only extremely valuable but in numerous cases, the rule rather than the exception.
R&D Adds Incalculable Value to both Canadian and Global Advancement
Research and Development work is the lifeblood for continued growth in innovative countries. Innovation is beneficial to a country's economy. New technology drives B2C spending, creates jobs, and increases efficiency in this area. By encouraging local organizations to undertake R&D, Canada is put in a position where it can invest more locally, while the need to depend on offshore innovators is minimized. This means that even SR&ED projects that fail will contribute to Canada's expanding role as a global innovator as it adds to the domestic technological and scientific knowledge base.
Canada has certainly earned its reputation as a growing innovation centre. This is attested to by the fact that 0.84% of GDP is spent on R&D. This number means that Canada is ranked 8th among its peers, providing another very powerful reason to prioritize support for SR&ED projects, even if those have failed. This provides abundant opportunities for allocating more funds to projects that stimulate innovation.
SR&ED Funding Can Support Your R&D Work
The goal of every SR&ED project is to successfully demonstrate hypotheses. Even projects that fail offer some level of success for your company, the Canadian government, and the world’s technological growth, as both knowledge and future innovations will progress due to the failure.
To receive your refund timeously and to continue the R&D work, it is important that you understand the SR&ED programme’s goals.
Find Out How Much Money You Can Recover From The CRA
Book a free consultation with one of our SR&ED tax credit experts.
Fill out the form to schedule a conversation, where we can help identify:
- What projects qualify and which R&D expenditures are eligible
- An estimate of the total return you can expect
- How to maximize the size of a claim & and to optimize for the success of that claim
- Potential eligibility for additional Government funding programs
- If you are already claiming, we will analyze your past claims to determine if anything was missed
CLIENT CASE STUDIES
"For over 17 years we have relied on Flow’s expertise in government funding applications, strategies and best practices. We have always been extremely happy with the results of their diligent work."
Of SR&ED claims filed
Growth in employee count
Claims accepted as filed