SR&ED In A Nutshell:
R&D successful claim is very much based on issues relating to the novel technology your organization is trying to develop. The tax saving is a consequence of being able to demonstrate to the IRS (USA) and CRA (CANADA) that your organization has been carrying out typical QUALIFIED R&D activities.
What The Rules Were
Before The Changes!
Incremental SR&ED
Experimental Development Project:
It used to be enough
to demonstrate that the company has invested time and other resources in order
to create a new product or process. The work done to achieve the objective must
reflect efforts that are not routine practice. Also required was a reasonable
substantiation that the company’s knowledge base and publicly available
techniques, or methods, were not sufficient to allow the company creating the
targeted new product or process. The same requirements would apply in case the
company was modifying its existing product or process.
An SR&ED project
description, which clearly demonstrates the gesture of the above requirements,
would satisfy the eligibility criteria of Technological Advancement,
Technological Uncertainty/Obstacle and the Work Done.
The requirement of
adequate documentation, to substantiate the eligibility mentioned above, has always
been a loose definition and rarely prompted CRA to disallow an SR&ED claim.
Under the above rules,
many companies were successful in applying and obtaining the Incentive
SR&ED Credits “ITC”.
What Are The Changes?
The new changes do not
affect an SR&ED project in the Scientific Research field, which is
naturally seeking to attain Advances in Science. The changes affect the
Experimental Development projects.
Generally, all of the above
mentioned requirements are still in effect. Added to them is the following:
- The Meaning of Technological Advancement
It is no longer enough to experimentally develop a new product or
process. The focus must be on developing New Technologically Advanced KNOWLEDGE
in a GENERIC form to be utilized in the Experimental Development projects of
future/existing new products or processes. The obvious reason for such new
definition is to force the taxpayer to alleviate/advance its intrinsic TECHNOLOGICAL
KNOWLEDGE BASE and not to hastily embark on a routine TRIAL AND ERROR exercise
to manufacture a new product or create a new process for producing the same
product, or a variety thereof. The latter activity is often confused with
process optimization, which is a routine affair of the production planning
department in any company.
Such new definition of the Technological Advancement contents makes the
SR&ED project a more serious undertaking, as compared to the work involved
in pushing a new product off the door.
A very strong argument in favour of the new CRA definition of the
SR&ED project is that the company would not have accepted a contract to
produce the new product if it was UNCERTAIN that it can deliver. This argument,
however, is not always valid in all cases.
Briefly, the new definition of the SR&ED project is a drift towards
including some sort of Scientific Research or serious Experimental Development
work.
- Documentation
As a starter, the existence of good documents of the project activities
and resources allocation has always been a STATUATORY requirement.
With the new CRA definition of the SR&ED project, documenting the
project becomes a must to have for a fair and objective assessment of the
eligibility of the claimed SR&ED project.
The new T661 form clearly defines the types of the required documents.
There is no suggestion that every taxpayer or company must have all of the
mentioned types of documents.
Frankly speaking, the lack of documents is the major reason behind the
high costs involved in preparing and assessing most of the SR&ED claims. It
is piteous that the remedy of such deficiency is very easy to attain. For
example, many companies are ISO certified or certified to some other Quality
Control program. A slight tweaking of some readily available QC procedures
would create the required documents.
Failing to document the SR&ED results and activities defeats the
purpose of the systematic REPRODUCABLE experimental work and its results are
often lost.
How To Achieve
Compliance?
The first and obvious step
a company must take is to become serious about its SR&ED efforts/vision and
not the SR&ED claim.
The second step is for
the management of the company to assess the benefits of the SR&ED process
within the context of its products, the competition and of course the bottom
line performance. Such a study must include elements of the costs involved to comply
with CRA requirements and definitions in terms of available/lack of QC
procedures. There must be some sort of official procedure to conduct and claim
the SR&ED projects.
There are many
approaches a company may utilize to become compliant. Some of them are indeed automatic.
Depending on the company’s size, there is always a solution. Please contact us for suggestions. We are prepared to offer you a FREE assessment for a suitable solution.
You definitely need scientists, programmers and engineers to establish the necessary facts. IRS/CRA usually hire engineers, experts and scientists to assess your R&D submission.
We have more than 20 years experience in assisting clients. Please contact us should you need assistance. Our expertise is confined to Aerospace, Defense, Automotive, Tools and Die and Software.
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