SR&ED for Manufacturers
What is SR&ED?
Scientific Research & Experimental Development (SR&ED) is a Canadian government tax credit program aimed at encouraging businesses of all sizes to conduct research and development (R&D) to develop new — or improve existing — methods, processes, services and products.
Any business that conducts R&D in any field is eligible for these tax credits, providing its activities meet the standards that have been specified. If a manufacturing business already performs activities that qualify for an SR&ED tax credit but does not submit claims for reimbursement of the costs, it is failing to leverage a valuable potential source of capital.
Manufacturers need to look at making innovation more affordable by investigating how they can qualify for R&D refunds that will help cover their costs of materials and wages, as well as other related expenses.
Activities in the Manufacturing Industry that Qualify
The SR&ED tax credit’s eligibility criteria focus on the R&D activities a company undertakes and how these are conducted and are the same across all industry sectors. The R&D team must employ a systematic approach in identifying a need and developing a proposed solution. The need identified must reflect a valid technological or scientific uncertainty that can’t be solved by existing products, processes, or materials.
It should be noted that an SR&ED project succeeding is not an eligibility requirement. The Canada Revenue Agency (CRA) does not simply reward successful advancements, but its aim is rather to encourage R&D work regardless of the outcome’s success or commercial viability. Their goal is therefore to support technological advancement by Canadian companies in Canada to create a reputation as a major innovator globally.
Several activities in manufacturing may qualify for an SR&ED tax credit including:
- Combine materials in innovative and new ways
- Develop new applications for components that were not originally designed to work together
- Adjust and/or reformat products so that they achieve a specific objective not previously produced
- Establish new product finishing processes and procedures that are seen as a technological advancement
- Reformulate equipment to achieve new objectives
An R&D tax credit may also be awarded for developing a new process. If a new solution is for example created to mitigate a safety challenge or hazard, those activities may meet the requirements of the SR&ED program.
R&D Expenses in the Manufacturing Industry that Qualify
Maintaining a competitive edge in this challenging landscape requires constant innovation. The innovation required to stay a step ahead of your competitors is made easier with refunds of as much as 69% of eligible SR&ED expenditure.
Within the R&D activities that are eligible for an SR&ED tax credit, there are specific expenses that may be claimed. Submitting non-qualifying expenses and poorly documented expenditures will result in a claim being denied, or a refund being delayed.
The expenses in the manufacturing sector that qualify for an SR&ED tax credit include the following:
- Materials that are expended or altered during eligible activities
- Prototypes that were developed using these materials
- Employee wages paid to undertake eligible R&D activities
- Mathematical analysis
- Engineering and design
- Data collection
- Computer programming
- Psychological research
Expenses relating to eligible work done under contract by a third party may also be claimed, although only 80% of those expenses are reimbursed.
To ensure that the full value of an SR&ED claim is received, detailed records of methods used, work performed, and expenses incurred should always be kept.
Activities in the Manufacturing Industry that Don’t Qualify
Although there is a good probability that R&D activities may qualify for an SR&ED tax credit, there are some R&D activities that won’t qualify.
The following activities don’t qualify for an SR&ED tax credit, not only in the manufacturing sector but in any industry:
- Commercial production and development of improved or new products, or the use of such products
- Normal testing of products, processes, devices, and materials
- Quality control activities
SR&ED tax credits are also not available for activities relating to the production of, prospecting, and/or drilling for natural gas, petroleum, or minerals. R&D work may however qualify if a company supports the exploitation and/or discovery of natural resources, or manufactures equipment for those practices.
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