Ontario’s SR&ED program provides one of the most lucrative tax credits for companies engaging in clear research and development, yet many companies that would be eligible don’t even bother applying, most often because they assume their project would not qualify. This post looks into one of the main sources of this misconception—uncertainty about the distinction between routine engineering and SR&ED work. The span of eligible SR&ED activities are likely broader than you think.
SR&ED Eligibility – Projects and Activities
To qualify for the SR&ED tax credit, your company must actively engage in:
- basic research
- applied research
- experimental development
- design and engineering work that is commensurate and directly in support of any of 1, 2, or 3
The fourth criterion is of interest here—even if your company’s work includes standard engineering activities, it could still qualify for SR&ED credit. Sometimes companies do in-house engineering design while out-sourcing manufacturing services, and view the entire sequence of development as an engineering standard practice. In development of a new product, improvement to existing products or processes may have taken place if the whole project is viewed as one system with clearly defined overall technological goals—the key is technological uncertainty.
Questions to Determine SR&ED Eligibility
Many manufacturing businesses may want to improve their various processes’ efficiency without investing in new, reliable equipment. If this is the case, and the business undertakes a systematic investigation in order to change process parameters, these activities may very well constitute eligible experimental development work.
The questions that need to be posed are:
- Are the properties of the input raw material different than what the equipment is designed for?
- Is there more scrap than usually associated with the same type of production?
- Is there integration of new parts of the equipment to the existing ones that are not designed to work together?
- Do the attempts to speed up production rates on existing equipment through modifications result in downstream changes affecting process characteristics?
- Are there new jigs and fixtures designed to be implemented in the production process?
- Are there new regulations limiting industrial waste, requiring changes to the production?
If you answered yes to any of the above questions, you may be performing eligible activities for SR&ED purposes.
Routine Engineering vs. SR&ED Work
It is important to distinguish between routine projects and SR&ED project activities (as they are mandated by legislation). To carry out SR&ED projects, one must seek technological advancements, however slight, that require removal of technological uncertainty through systematic investigation process. Many activities, such as installation of new equipment, standard testing, automation of process or engineering design practices would be considered as routine. As well, there are some activities clearly described as non-eligible by legislation, such as routine testing and manuals creation.
Most businesses carry out standard engineering activities whose combined purposes and projects can inadvertently lead to technological advancements.
This article is presented only for informational purposes and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual situation.