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Company Project vs SR&ED Project

Many people mistakenly believe that a “business as usual” project can sometimes qualify for Scientific Research and Experimental Development (SR&ED) funding, but this is not true. Tax credits given via the SR&ED program are aimed at projects Canadian companies undertake where the goal is to be innovative and make new discoveries in technology and science. There is however often work that is SR&ED eligible within a company project. As the difference is not always clear, getting the most SR&ED tax credits funding can be tricky.

The guidelines on the eligibility of work for SR&ED tax incentives policy are now broken into two sections: Why and How SR&ED is conducted. They are the two key requirements that must both be met for work to be eligible as SR&ED.

  • The WHY Requirement: There should be a degree of scientific or technological uncertainty, for example when there is insufficient knowledge in open sources to determine whether a given objective or result will be accomplished.
  • The HOW Requirement: How was the uncertainty resolved? A company must differentiate between the eligible experimental work and the ineligible standard practice or application of the technology. This can be achieved by formulating a hypothesis once all standard approaches have failed.

Goal Definition

Company projects can have numerous different goals, set to ensure outcomes believed to be important for the business. With SR&ED projects, goals are not so much money and business-focused but much more focused on discovery and knowledge. To qualify for a Canadian SR&ED tax credit, the project must resolve (or attempt to resolve) a technological or scientific uncertainty. This is not the same as standard R&D or process improvement. SR&ED projects always have to start with a hypothesis and its goal should be to eliminate the uncertainty.

Uncertainty versus Problem

Companies trying out new ideas to solve a company problem or experimenting with a process, they aren’t automatically dealing with uncertainty. Uncertainty is defined as a gap in technological or scientific knowledge, where bridging the gap will make a contribution to the total knowledge base, not only solving the company’s specific problem. If the company is for example using some type of trial and error method to identify something that isn’t running the way it should or a piece of equipment that is defective, you’re aiming at solving a problem, not eliminating an uncertainty. Even if the company is not certain about which part of the equipment is not working the way it should, there is still overall existing knowledge that can be applied to solve that specific problem and how to fix the equipment once the problem has been identified. Put simply, if you know how you can get from one point A to another, it’s not SR&ED.
This doesn’t mean that business-related problems don’t sometimes contain SR&ED eligible uncertainties. A company project often leads to or contains at least one SR&ED project. The need to discover inexpensive ways to achieve company tasks or price restraints may for example lead to the company innovating around these tasks and creating new methods for doing so. If that goal can’t be achieved via a widely-known or openly available way, the project may be eligible for SR&ED tax credits.

Approach Used

With SR&ED projects, the approach used must include experimentation or analysis and be conducted by an individual that is qualified to conduct the investigation due to their experience or credentials. As a trial and error approach is not seen as systematic, it isn’t eligible for SR&ED tax credits. An investigation into why something didn’t work is sometimes classified as a discovery in the SR&ED world.

Results

In an SR&ED project, it is essential to record results. Results must be analyzed and findings kept track of at each step. In a company project you may move on to the next possibility if an unfavorable result is reached, but that is not the case with SR&ED projects.

Conclusion

Many companies execute projects and keep track of them for various reasons. If your project is partly or completely SR&ED eligible, provincial and federal tax programs can help you fund the project. Take the time to determine if your project is eligible. If it is, track the project as per the SR&ED requirements and you may be able to use less of your own capital to do more.


 Written by: 

Bryan Watson  

Partner, Flow Ventures

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Warren Wilansky
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