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:
The characteristics of an SR&ED project;
Distinctions between a company project and an SR&ED project according to the Canada Revenue Agency (CRA); and,
An example distinguishing between company projects vs. SR&ED projects.
Characteristics of an SR&ED Project
According to section 3.1 1 of the Eligibility of Work for SR&ED Investment Tax Credits Policy,
- Every project claimed must fall within the definition of SR&ED in subsection 248(1) of the Act. An SR&ED project is defined as a project comprising a set of interrelated activities that:
collectively are necessary in attempting to achieve the specific scientific or technological advancement defined for the project by overcoming scientific or technological uncertainty; and
are pursued through a systematic investigation or search in a field of science or technology by means of experiment or analysis performed by qualified individuals.
Whether the work claimed meets the definition of SR&ED in subsection 248(1) of the Act is determined solely by examining the nature and characteristics of the work itself. In other words, it is not the overall commercial objective but rather what is actually occurring at a technical level that is relevant. The key point is whether the work has the characteristics to meet the definition of SR&ED, and not the overall goals in a commercial sense.
Company Project vs. SR&ED Project
As noted in section 3.2 of Eligibility of Work for SR&ED Investment Tax Credits Policy,2
A distinction must be drawn between a company project and an SR&ED project. “Company project” is a generic term referring to undertakings by a company to have an impact on its business; for example, building new facilities or expanding facilities, developing new products and product lines, changing business practices, upgrading processes and facilities, and engineering projects. A company project is a project with a commercial purpose, whereas the purpose of an SR&ED project is for the advancement of scientific knowledge or for achieving technological advancement. Paragraph (c) of the definition of SR&ED recognizes, and in fact requires, that the experimental development be done for the purpose of achieving technological advancement in the context of creating new or improved materials, devices, products or processes.
An SR&ED project usually occurs as a subset of a company project. Therefore, not all of the work performed within a company project will necessarily fall within the scope of the SR&ED project. Also, it is possible that the same company project contains one or more SR&ED projects, some of which may involve experimental development and some of which may involve basic research or applied research.
Differentiating Between a Company and SR&ED Project
On September 18, 2013, the CRA released specific examples onto their website to help illustrate SR&ED eligibility. These examples were released as part of their Policy Review project which officially concluded in December 2012. While some of these examples have since been integrated into policy documents, and others have been removed from access on the website, a complete list is still available on KPMG’s website.3
Example 10 illustrates concepts from paragraph 2, section 3.2 of the Eligibility of Work for SR&ED Investment Tax Credits Policy. It shows that an SR&ED project usually occurs as a subset of a company project.
A company wanted to develop an improved electronic product by incorporating a specific component that would add a new functionality. The company prepared a project plan including budget, created a new cost centre, and allocated staff to work on the project. The company then proceeded with the technological feasibility study, preparing the technical specifications, designing, building the prototype, testing, and making the final incorporation of the component into the product before starting the commercial production, marketing, and sales. In this case, the company project encompasses all the activities from initial idea to final product launch.
During development, a problem arose with the size of the existing product. Knowledge of miniaturization in the field of microelectronics was required to fit the new component into the existing product. The company did not possess that knowledge. As a result, the company contracted out the miniaturization work. The contractor performed SR&ED work on behalf of the company. The work succeeded in reducing the size of the specific component so that it would fit into the current product. Once the specific component was successfully developed, it was incorporated into the existing product without any difficulty and the rest of the development was accomplished by standard practice.
In this example, the SR&ED project encompasses the work done to miniaturize the specific component, which is a subset of the overall company 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 the distinction between a commercial project and an SR&ED project during claim-filing and review.
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&ED, 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.
- Canada Revenue Agency. (2015, April 24). Characteristics of an SR&ED project. In Eligibility of Work for SR&ED Investment Tax Credits Policy (Chapter 3.1). Retrieved August 25, 2017, from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/lgbltywrkfrsrdnvstmnttxcrdts-eng.html#s3_1. ↩
- Canada Revenue Agency. (2015, April 24). Company project versus SR&ED project. In Eligibility of Work for SR&ED Investment Tax Credits Policy (Chapter 3.2). Retrieved August 25, 2017, from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/lgbltywrkfrsrdnvstmnttxcrdts-eng.html#s3_1. ↩
- KPMG. Public Consultation – Concept Examples for Eligibility of Work for SR&ED Investment Tax Credits (PDF document). Retrieved August 25, 2017, from: http://www.kpmg.ca/ecommunications/marketing/SRED%20Submission/SRED%20Submission.pdf. ↩