Little Known Sectors that Qualify for SR&ED Part Four: Food-manufacturing

September 28, 2023 Janette Conway

Uncovering the little-known sectors, like agriculture, that qualify for SR&ED. — Uncovering the little-known sectors, like food manufacturing, that qualify for SR&ED.

When most people think of the Scientific Research & Experimental Development (SR&ED) tax credit, their minds may turn to technology companies developing groundbreaking products or individuals working on scientific breakthroughs in lab coats. However, SR&ED is not just limited to the technological industry. A recent legal ruling, Canafric Inc. v. The King (2023), has brought to our attention another sector that is often overlooked in SR&ED: food manufacturing and processing (previously we have discussed agriculture, medicine, and manufacturing). We will discuss this industry in this article.

Little-known SR&ED sectors: The Food manufacturing and Processing Industry

Food manufacturing may not strike you as a typical SR&ED activity. However, SR&ED is not just limited to one specific industry. According to Appendix 1 of the Guide to Form T661, the following industries can apply for the SR&ED tax credit:

Natural and formal sciences, including physical and chemical sciences.

Engineering and technology, including civil engineering and mechanical engineering.

Medical and health sciences, including basic medicine and clinical medicine.

Agricultural sciences, including animal and dairy science, and biotechnology.¹

Please do not be fooled into thinking you are ineligible for an SR&ED tax credit. Firstly, any business of any size can qualify. Also, SR&ED does not strictly require laboratory research. SR&ED requires advancement in the knowledge base or overcoming technological uncertainty in some way.

The Canada Revenue Agency’s SR&ED Glossary defines “advancement” as:

Scientific or technological advancement is the generation or discovery of knowledge that advances the understanding of science or technology. ²

The glossary also defines “uncertainty” as:

Scientific or technological uncertainty means whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of scientific or technological knowledge.³

Food manufacturing are often closely associated with agricultural business. See our article “Little Known Sectors that Qualify for SR&ED Part One: Agriculture” for an in-depth analysis of how agricultural activities may qualify for SR&ED.

Fields of Science or Technology that may apply to the food manufacturing industry in the T4088

Some codes that may relate to the food-manufacturing industry are as follows:

Chemical engineering

2.04.01 – Chemical engineering (plants, products)

2.04.02 – Chemical process engineering

Materials engineering

2.05.03 – Coating and films (including packaging and printing)

2.05.04 – Plastics, Rubber, and Composites (including laminates and reinforced plastics)

Other engineering and technologies

2.11.01 – Food and beverages⁴

More codes can be found in the appendix for the T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661. You will need to select the field of science or technology that best describes the primary field in which the SR&ED project attempted to overcome uncertainty and insert this code into line 206 of the T661 form. The project qualifying for a tax credit may be in a different field of science or technology than your company’s typical business.

How can food manufacturing qualify for an SR&ED tax credit?

Most food manufacturing operations utilize standard methods and procedures and would not qualify for the SR&ED tax credit. However, the solutions or processes may not be immediately apparent in some cases, making those activities eligible. Some examples of such activities are listed below:

A new food manufacturing process.
A new way of increasing the longevity of food.
A new way to store food.
Development of new or customized food storage equipment.
Making modifications to pest control measures.
Reducing pollution and waste.
Trials to improve food nutrition.

As long as there is new information / new knowledge in a field of science or technology, by means of experiment and/or analysis, it does not matter if the project was a success – you have addressed an uncertainty.

How can I qualify?

Who can qualify? A wide range of food-manufacturing businesses, such as (but not limited to):

Seafood producers.
Poultry producers.
Dairy and egg producers.
Fruit producers.
Meat processing and slaughtering operations.
Wineries and hops farms.
Pet and animal food manufacturers.

A number of activities in those sectors may qualify for the SR&ED tax incentive by:

Meeting consumer needs, such as developing gluten-free food.
Improving the nutritional profile of a product, such as fortifying a food or beverage with vitamins and minerals.
Increasing preservation and flavour, such as increasing the shelf life of food products.
Improving packaging or production by altering manufacturing processes or machinery.

Just be sure that, in making your claim, you consider the following eligibility criteria established in the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives:

The “Why” requirement

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 “How” requirement

Work must be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis (contained in the beginning of the definition).⁵

Canafric Inc. v. The King (2023): A court case to consider…

The Tax Court of Canada has recently settled a dispute over what constitutes a successful SR&ED claim in the food manufacturing sector. In Canafric Inc. v. The King (2023), the judge allowed the costs associated with developing frozen foods as SR&ED-eligible expenses.⁶

The Appellant (Canafric Inc.) is a food manufacturing business specializing in developing frozen pies. During the 2013-2016 taxation years, the Appellant carried on various projects and activities aimed at developing new or advancing pre-existing products. The Appellants’ SR&ED claim was reassessed by the Minister of National Revenue (‘Minister’) and the expenditures related to projects 1304, 1306, 1401, 1402, 1501, 1502 and 1602 were denied. In this case, the Appellant appealed the Minister’s decisions arguing the work done in these projects did constitute as SR&ED within the meaning of subsection 248(1) of the Act.

The Judge made note that the appellant’s expert witness, Mr. Suvrut Pandya, was credible and reliable. Mr. Pandya was involved at every stage of the review process for all the Taxation Years and he spoke to the specific technical challenges encountered in every project. The Judge was impressed with Mr. Pandya’s good recollection of the various meetings with CRA representatives during the review process as well as the specifics of the technical discussions that took place during those meetings. In contrast, the Judge also stated that the Respondent failed to address the Appellant’s evidence in a forthright manner, especially the documentation provided to the CRA and the detailed technical discussions, which took place during the on-site meetings.

The Judge used the definition of SR&ED as written in the Income Tax Act, and the five-factor test first posed by Judge Bowman within the case of Northwest Hydraulic Consultants Ltd. vs. The Queen (1998), to determine if the Appellant’s research activities within each of the denied projects met the definition of SR&ED activities and that the expenses it incurred were deductible expenses for SR&ED and therefore eligible expenses for the calculation of the ITC.

Based upon the evidence, which the Judge stated was “most compelling and met the burden put forth upon them by the pleadings”, the Appellant was able to successfully establish that the 2013, 2015, 2015 and 2016 SR&ED Claims met all five criteria established in Northwest Hydraulics:

There was a technological risk or uncertainty, which could not be removed by routine engineering or standard procedures.
Canafric formulated hypotheses specifically aimed at reducing or eliminating that technological uncertainty.
The procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses.
The process resulted in a technological advancement.
A detailed record of the hypotheses tested, and results were kept as the work progressed.

The appeal was allowed with costs.

As you can see, you may be surprised by what constitutes qualification for SR&ED tax credits. As long as you can prove that the expense is related to SR&ED, you should be able to qualify for SR&ED.

Conclusion

While many food manufacturing businesses do not claim SR&ED tax credits, there are some activities that are eligible for SR&ED. You do not have to be a big, multi-national business to claim them, either. Also, it is not necessary for your experimentation and development to be a perfect success. If you advanced the current knowledge base and have the proper documentation proving your work, you have the right ingredients for an SR&ED tax credit claim. See our article “Technological Advancement: The Core of SR&ED” to gain a deeper understanding of how technological advancement may come about and how your projects may be eligible for SR&ED.