10/11/2005
SR&ED: Tax Savings from Everyday Activities

By GARY KOPSTICK, BComm, CA, Senior Tax Partner

One often reads about the importance of scientific research and experimental development (SR&ED) to economic growth. Everyday activities may qualify as SR&ED and can yield federal and provincial tax savings. These savings range from 57˘ to 71˘ for each dollar spent by a corporation on SR&ED. There are also lesser savings available to non-corporate taxpayers.

We have uncovered situations where, by classifying the SR&ED expenses correctly, our clients have recovered a portion of their business costs where management was not previously aware that a substantial tax “rebate” existed.

Defining SR&ED

To qualify for SR&ED tax savings, systematic experimentation must be carried out by means of experiment or analysis in an area of technological uncertainty.

The SR&ED benefit is calculated based on the cost of equipment, labour and overhead of such endeavours.

While a proper scientific approach must be followed, such experimentation does not have to be carried out in a laboratory or in a pilot plant. The use of full-scale operating equipment may be acceptable (although the amount of tax saved is reduced based on the cost of the equipment not used at least 90% for SR&ED).

What to Look For

Developing a product or modifying a particular product or process, where such changes would affect the overall efficiency of the process, should qualify as eligible SR&ED activities. An example of an eligible activity includes modifying a process that includes the efficient use of raw materials to reduce waste, conserve energy or create new by-products.

The technological advancement need not be “earth shattering”, but must represent an increase in your own knowledge and understanding of the impact of changes on performance and quality. Even failed experiments may qualify because they provide an advance in knowledge. Failures tell you which routes should not be followed.

It is very likely anyone developing new or improved products or processes of any kind is undertaking SR&ED as part of their normal business operations. This would, for example, include activity normally undertaken to provide advancements in taste, texture and shelf-life of food products, enhancing the mechanical performance and durability of goods and devising changes in the process of delivering services such as medical treatments.

Technical Requirements

You will be able to claim the tax incentives if the above-mentioned activities are undertaken in a systematic manner in order to meet specific performance targets or specific changes, and if the progress is appropriately documented. You must measure results obtained in order to show either technological advancement or lack thereof in a given situation.

For a successful SR&ED claims, the project must encompass all of the following characteristics:

- Technological uncertainty in the activity undertaken;
- Technological advancement in standard practice or a business product; and
- A scientific mode conducted by individuals qualified to do such experimentation.

In order to satisfy these requirements, a detailed project description and prescribed financial data must be prepared and submitted with your tax return.

We have seen successful SR&ED claims made by companies involved in different industries, including the following:

- Software development;
- Food producers;
- Machinery manufacturing; and
- Creative architectural innovations.

If you believe that you qualify, there are professionals with scientific expertise available to prepare or assist with the technical scientific report and the accumulation of relevant financial data.

If you think that you may benefit from SR&ED tax savings, please contact your Soberman advisor.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.