Claiming SR&ED on legacy software

Even ‘ancient’ software and hardware can qualify for SR&ED!

In March 20, 2013, the local CRA office of Ottawa, in combination with local business leaders, hosted an industry-specific seminar that was designed to show how software development fits within the SR&ED program.  The CRA recently posted some SR&ED examples on their website, but they didn’t include any mention of software applications. With that in mind, below is the second software case study examined in the seminar.

Part 1 of this series covered ‘Cutting Edge’ technology, part 2 covers ‘Trailing Edge’ software, and part 3 will provide an overview of the recent financial changes and applications to software development.

Organized by the CRA SR&ED Software Committee, the four-hour F2013 Software Seminar took place in downtown Ottawa. Find below a ‘Trailing Edge’ software case study presented at the conference.

SR&ED Case Study – CanHealthCo.

A link to the background material provided on CanHealthCo. can be found here. Look it over before reading on!

In contrast to the first case study, which focused on cutting edge technology, this example examined what happens when developing software related to older systems and technology.  In the original example, there were a number of exciting marketing terms that were introduced to increase the apparent eligibility of the work being investigated.  In this case study, however, the initial descriptions provided a very dull overview of the work required, which made it very easy to dismiss the work as routine engineering.  Other high risk factors include:

  1. The business project as a whole involved both the legal team and the company’s business team; legal fees and business management are explicitly excluded from eligible SR&ED work.
  2. The project required a subscription to a SaaS provider, which normally suggests that this project will just involve routine integration with their systems.
  3. A primary aspect of the project was the development of a sales app to integrate the tablet with other sales reporting applications. Any integration with sales is normally associated with a mature, commercialized product, and thus falls outside of claimable SR&ED work.

Technology Details are Essential

The case study goes on to say that even though these activities are normally part of a company’s routine product development, interviewing the key employees who performed the work can lead to the discovery of important information.

For example, the inclusion of the legal team created a number of key product features (which are irrelevant for SR&ED), but they created the need for technological advancements in security/privacy in order to allow these features to exist.  The legal team’s time could not be claimed, but all of the engineering work related to the security investigation suddenly became an important element of the SR&ED claim.

Other Key SR&ED Notes

A few other key points that emerged from the Q&A during the meeting:

Training: Training in and of itself is not an eligible SR&ED activity, particularly if it is for a well-known technology (e.g., retraining on Java, C++, etc.).  Even if specialized knowledge is required, the CRA considers this to be a support activity and is thus an overhead expenditure.  If claiming with the proxy method, training activities cannot be claimed at all.  If the traditional method is used, then this can be claimed if the training was directly related and incremental to the SR&ED work.

Subcontractor Arrangements: There are a number of key factors that must exist in any subcontracting agreement for one company to claim SR&ED.  Unfortunately, there is no ‘magic bullet’ phrase which can easily allow one company to claim SR&ED credits for the work performed.  The claiming company should own the IP to the work and hold the ‘risk’ of the development process.  In this situation, light, hourly arrangements (where the claiming company is responsible for cost over-runs) are better than a fixed fee contract (where the contractor would have to absorb the cost of any extra development time required).

Subcontractor Location: All SR&ED must be conducted in Canada, but an interesting question was raised regarding sub-subcontracts: If a business hires a Canadian company to perform SR&ED but they then subcontract the work (without the knowledge of the first company) to a foreign company, would the CRA dig deep enough to find this relationship? What level of due diligence is required to ensure this does not occur?

The answer is that the CRA will perform a reasonable search. Ideally, the company should specify that the work will be performed in Canada in their contract.  The company must have a reasonable expectation that the work will be performed in Canada (e.g., if the work is contracted to ‘Overseas Engineering Inc.’, the CRA may require extra investigation to confirm where the work was performed).

Do you have more questions about SR&ED? Contact us directly or start a discussion on our LinkedIn group.
Better yet, sign up for the Comprehensive Guide to SR&ED.


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