Uncovering the little-known sectors that qualify for SR&ED.
When most people think of the 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. 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.
The sad news is that most companies in various sectors think getting an SR&ED tax credit is difficult, and that they will not qualify for it. Thus, these companies do not make a claim. Another misconception is that their business is not big enough to qualify for the tax credit when the truth is any business of any size can qualify. They also do not need to conduct laboratory research. They just have to advance technology or remove technological uncertainty in some way to apply for SR&ED.
The Canada Revenue Agency’s SR&ED Glossary defines “advancement” as:
Scientific or technological advancement is the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology. This definition encompasses the definition of scientific advancement, advancement of scientific knowledge and technological advancement. The only difference is that scientific advancement and advancement of scientific knowledge relate to science whereas technological advancement relates to technology.
Scientific or technological uncertainty means whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience. This definition encompasses the definition of scientific uncertainty, technological uncertainty and technological obstacle. The only difference is that scientific uncertainty relates to science whereas technological uncertainty and technological obstacle relate to technology.
In this blog post and those that follow, we will look at some of the sectors that can qualify for an SR&ED tax credit – sectors that go beyond just information technology, starting with agriculture and agri-foods.
What Agriculture And Agri-Foods Qualify for an SR&ED Tax Credit?
Most farming operations are fairly standard and wouldn’t qualify for the SR&ED tax credit. However, SR&ED tax credits may not be immediately apparent in some cases, making those activities eligible. What would be eligible?
- A new cattle breeding process.
- A new way of increasing the yield of food.
- A new way to store food.
- Development of new or customized farm equipment.
- Making modifications to pest control measures.
- Reducing pollution and waste.
As long as new information has been generated or new knowledge discovered, it does not matter if the project was a success – you have addressed an uncertainty.
Also, if you are a farmer and contribute to organizations that fund research and development in agriculture, you may be eligible for an SR&ED Income Tax Credit. Sectors that have qualified in the past have included those related to the production of wheat, barley, and canola.
How to Qualify
Who can qualify? A wide range of agriculture and agri-food industries, such as (but not limited to):
- Seafood producers.
- Poultry producers.
- Dairy and egg producers.
- Fruit producers.
- Meat processing and slaughtering operations.
- 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.
- Increasing preservation and flavour — where the shelf life of food products is increased.
- Improving packaging or production by altering manufacturing processes or machinery.
Just be sure that, in making your claim, you consider the following eligibility criteria:
- The project should solve some degree of uncertainty (address a “gap” in the knowledge base).
- You took systematic steps to generate new information or knowledge.
- You have evidence and documents that support your submission.
One Court Case
The Tax Court of Canada has, from time to time, settled disputes over what constitutes a successful SR&ED claim in the agriculture and agri-food sector. For instance, in Mailloux v. the Queen in the year 2002, the judge disallowed fuel and transportation costs in the construction of a new building, as the new building would not have been for the purposes of SR&ED. Had the building been for the purpose of performing SR&ED work, then perhaps those costs would have qualified. However, in the same case, the judge allowed interest deducted from loans taken out to carry on SR&ED work.
As you can see, you can be surprised by what constitutes qualification for SR&ED tax credits. As long as you can prove that the expense is somehow related to SR&ED, you will be able to qualify for the credit.
Don’t Forget to Review the T4088 Appendix
When making your claim, do not forget to look at 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 was attempting to achieve an advancement and insert this code into line 206 of the T661 form. The project qualifying for a tax credit may be different from the field of science or technology as the overall company project or business that your company carries out on a regular basis. Failing to fill in this line could impact the eligibility of your application.
The codes related to agriculture and agri-food are as follows:
Other engineering and technologies
- 2.11.01 – Food and beverages
Agriculture, forestry, and fisheries
- 4.01.01 – Agriculture
- 4.01.02 – Forestry
- 4.01.03 – Fisheries and aquaculture
- 4.01.04 – Soil science
- 4.01.05 – Horticulture
- 4.01.06 – Viticulture
- 4.01.07 – Agronomy
- 4.01.08 – Plant breeding and plant protection (agricultural biotechnology under 4.04.01)
Animal and dairy science
- 4.02.01 – Animal and dairy science
- 4.02.02 – Animal husbandry (animal biotechnology under 4.04.01)
- 4.03.01 – Veterinary science (all)
- 4.04.01 – Agricultural biotechnology and food biotechnology
- 4.04.02 – Genetically modified (GM) organism technology and livestock cloning
- 4.04.03 – Diagnostics (DNA chips and biosensing devices)
- 4.04.04 – Biomass feedstock production technologies
- 4.04.05 – Biopharming
Other agricultural sciences
- 4.05.01 – Other agricultural sciences
It is sad that most agriculture and agri-food businesses don’t claim SR&ED tax credits. There are a number of activities that can be claimed, as we have highlighted here, and you do not have to be a big, multi-national business to claim them. You do not need for a new process to be a success, either. So long as you have the proper documentation proving your work and that the work tried to solve some degree of technological uncertainty, you have the right ingredients for an SR&ED tax credit claim.
Forthcoming articles will look at other sectors that are overlooked when it comes to those making SR&ED claims. In the end, you do not need to be a scientific or tech company to qualify, as this article has already shown.