Company Project vs SR&ED Project: Not The Same
Updated to Reflect New Policies (2022)Â
*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. ***Â
Once you understand the differences, you’ll see that comparing company projects and SR&ED projects is akin to comparing apples and oranges. One common source of confusion for first-time claimants is the difference between a company project and a Scientific Research and Experimental Development (SR&ED) project.
Given the critical importance of correctly separating activities/expenses between SR&ED work and routine commercial endeavours before filing a claim, we will discuss:
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The characteristics of an SR&ED project; and,
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Distinctions between a company project and an SR&ED project according to the Canada Revenue Agency (CRA).
Characteristics of an SR&ED Project: The Why and How of SR&ED
According to the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives1, the SR&ED eligibility of a project is determined by the “Why” and “How” of the project.
The “Why”
The “Why” requires the presence of scientific or technological advancement. The work is ineligible if it is not completed for the purpose of scientific or technological advancement, regardless of the type of work being accomplished. The Guidelines state:
Work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement (contained in paragraphs (a) to (c) of the definition). The key to both is the generation or discovery of knowledge that advances the understanding of science or technology. The type of knowledge in this context is conceptual knowledge, such as theories or prediction models, rather than just factual knowledge, such as data or measurements.2
For scientific or technological advancement to be present, there must first be a scientific or technological uncertainty. The CRA’s Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives explain how to determine if new scientific or experimental knowledge is required:
It is needed when it is unknown (or uncertain) whether a given result or objective can be achieved, due to an insufficiency in the available scientific or technological knowledge. This is referred to as a scientific or technological uncertainty. Note that the available knowledge is the combined scientific or technological knowledge of the resources within your business and those sources that are reasonably available to you publicly.3
The “How”
The “How” requires that the work must be systematic as contained in the definition of SR&ED and that while many businesses follow their own practices, and while these are often systematic it may not be enough. The Guidelines state:
It is important to distinguish between a systematic approach to carrying out work and the approach that is a systematic investigation or search called for in the definition of SR&ED. The latter approach includes:
- Generating an idea consistent with known facts, which serves as a starting point for further investigation towards achieving your objective or resolving your problem. Your idea may be expressed as a possible solution to a problem, a proposed method or an approach. This can be referred to as a hypothesis.
- Testing of the idea or hypothesis by means of experiment or analysis. The idea can evolve and change as a result of testing.
- Developing logical conclusions based on the results or findings of the experiment or analysis.
- Keeping evidence that is generated as the work progresses.4
SR&ED Project Exclusions
As noted in the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives certain categories or work are considered ineligible for SR&ED. The categories include:
- Market research or sales promotion
- Quality control or routine testing of materials, devices, products or processes
- Research in the social sciences or the humanities
- Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas
- The commercial production of a new or improved material, device or product, or the commercial use of a new or improved process
- Style changes
- Routine data collection5
These categories of work are referred to as exclusions and cannot be claimed. The guidelines state:
Excluded work should only be considered after you have identified that eligible work has been performed. This could mean that even if some of your work falls in the excluded categories, you may still have other work that is eligible. For example, your business may be conducting SR&ED while at the same time prospecting for minerals.6
Ensure the presence of eligible work before identifying the presence of ineligible work as it is possible for some portion of ineligible work to be claimed in support of the SR&ED project.
Not all of the work performed within a project will necessarily fall within the scope of an SR&ED project, but it is possible that even if some of your work falls in the excluded categories, you may still have other work that is eligible. The Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives state:
Any work that is commensurate with the needs and directly in support of basic research, applied research or experimental development work undertaken in Canada, falls within the meaning of SR&ED and can be claimed as part of the SR&ED project.7
While not all work is eligible for SR&ED, if it is commensurate with needs and directly in support of the SR&ED project then it may be classified as support work and the associated costs may be claimed.
Differentiating Between Company and SR&ED Projects
While the references to company projects’ vs. SR&ED projects’ are no longer a part of the CRA’s eligibility guidelines, as they were within the archived Eligibility of Work for SR&ED Investment Tax Credits Policy, defining how an SR&ED project differs from a company project remains essential in order to make certain your SR&ED claim is completed properly.
Since it is required that there must be a scientific or technological uncertainty present in order for there to be a goal of scientific or technological advancement, it follows that a ‘company project’ is a project which has a commercial purpose and no scientific or technological uncertainty as defined with the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Therefore, a company project is one that is undertaken in order to produce some commercial benefit for the company at the conclusion of the project.
Company Project vs. SR&ED Project: The Verdict
There is often confusion regarding the differences between SR&ED projects and company projects, especially during the process of separation and allocation of funds while filing a claim.
The CRA attempts to establish a clear understanding of what an SR&ED project involves.
SR&ED work bears very different objectives from the routine commercial endeavours of the company. While SR&ED attempts to achieve a technological or scientific advancement, a company project aims at enhancing an organization’s commercial and business standing. As per the characteristics of an SR&ED project, the key point is whether the work has the characteristics to meet the definition of SR&EDÂ and not the overall goals in a commercial sense.
Thus, barring certain exceptions, the SR&ED project will usually be undertaken as a subset of a company project undertaken by the claimant organization.