DO YOUR PROJECTS QUALIFY FOR RS&ED CREDITS?
The acronym "SR&ED" stands for "Scientific research and experimental development". In fact, there are two types of R&D project: SR (Scientific research) that concerns scientific advancement, i.e. the production of new knowledge in a scientific field. SR is generally carried out in the context of a public (university or institute) or private (consortium or other) research center.
Subsequently, the DE (Experimental development) concerns the production of new knowledge linked to the company's technologies. The ED is mostly carried out in-house, with the aim of creating new products/processes or upgrading existing ones.
If you're in a corporate context, and your scientific and technical people are investing efforts to advance the company's technological knowledge base beyond current practice to improve existing products/processes or to create new products/processes, their activities may be eligible to claim SR&ED credits.
Eligible expenses are
1. Salaries SR&ED: employee time invested directly in the SR&ED process or in activities in support of the SR&ED process.
2. Subcontracting SR&ED labor: subcontractors' labor time invested directly in SR&ED activities.
3. Material consumed or processed: expenditure on materials used in experimental activities (e.g. the cost of a prototype).
4. R&D contracts: R&D contracts with a public, university or private research center.
Here are the key concepts to master in SR&ED (from the SR&ED Glossary Canada Revenue Agency):
Technological progress
"Technological advancement is the production or discovery of knowledge that advances the understanding of technology."
Experimental development
"Work undertaken in the interest of technological progress with a view to creating new materials, devices, products or processes or improving, even slightly, existing ones."
Experiment
"An experiment is the verification of a hypothesis under controlled conditions."
Hypothesis
"A hypothesis is an idea, consistent with known facts, that serves as a starting point for further study aimed at proving or disproving that idea."
Technological uncertainty
"Technological uncertainty is not knowing whether a given result or objective can be achieved, or not knowing how to achieve it, due to insufficient technological knowledge."
Systematic investigation or search
"Systematic investigation or research, as defined by SR&ED , is an approach involving the definition of a problem, the formulation of a hypothesis to solve the problem, the planning and execution of experiments or analyses to test the hypothesis, and the development of logical conclusions based on the results."
Prototype
"A prototype is an original model from which something new is structured, and of which all objects of the same kind are representations or copies. It is the basic experimental model which possesses the essential characteristics of the intended product. A prototype is generally considered to be a test model or preliminary version. It is developed to verify the feasibility of a concept or hypothesis as part of a systematic investigation or research, and generally has no lasting value."
Scientific research and experimental development (SR&ED)
"SR&ED is defined for income tax purposes in subsection 248(1) of the ITA, as follows. "Scientific research and experimental development activities" means systematic investigation or research of a scientific or technological nature, carried out by means of experimentation or analysis, that is: a) pure research, i.e. work undertaken for the advancement of science with no practical application in view; b) applied research, i.e. work undertaken for the advancement of science with practical application in view; c) experimental development, i.e. work undertaken in the interest of technological advancement for the creation of new materials, devices, products or processes or for the improvement, even slight, of existing ones."
Technology
"Technology is the practical application of scientific knowledge and principles.Although technology may be represented in material form (patents, procedures, design documents, manuals, etc.), it is not a physical entity. Rather, it is the understanding of the transposition of scientifically determined facts and principles into the material, device, product or process."
The SR&ED tax credit program is a tax incentive offered by the Canadian government to support companies' efforts in the technological development of their products and/or processes. Over the past few decades, the program has evolved to meet changing contexts and international standards. For many years, Canada has been considered a pioneer in the development of its SR&ED program. Provincial governments have also enhanced their SR&ED credit grants to ensure that technology companies benefit from advantageous tax incentives.
Here are at least 4 good reasons to invest in well-structured RS&D projects:
1. Recover significant sums from SR&ED expenditures: These recovered amounts are essential to ensure that companies are able to reinvest in R&D. It is also important for companies to be able to maintain their R&D efforts each year.
2. Ensure the company's long-term competitiveness: the development of technological knowledge related to the company's products and processes is essential. This enables the company to constantly strengthen its competitive position.
3. Develop a strong R&D culture to support innovation : regular investment in SR&ED will contribute to a strong culture of innovation for the company, thanks to the application of best practices in the field.
4. Encourage motivation and the development of company knowledge and team spirit: as a bonus, SR&ED projects enhance the value of the company's experts by enabling them to develop advanced knowledge in their field.
To qualify a project as an ESRD project, it must meet two major requirementsWHY"and "HOW"as defined by the Canada Revenue Agency.
The "WHY" requirement: refers to the project's raison d'être, i.e. the reason why a company is carrying out a development project. The reason must be to fill a knowledge gap in relation to current practice in the field, which is the body of knowledge normally mastered by experts in a field and reasonably available in the public domain. In other words, the company must have had, from the outset, the aim (intention) of producing new knowledge related to the technology in its field.
The "HOW" requirement: refers to the way a company carries out a project, i.e. a typical SR&ED process. A serious and authentic SR&ED process is based on a rigorous and systematic approach involving successive stages of formulating hypotheses, conducting experiments and formulating conclusions with a view to producing new knowledge.
See the SR&ED requirements from the Canada Revenue Agency.
The raison d'être of a good consultant should be to save you time and money, while providing you with guarantees as to good SR&ED practices, all for optimal results in claims and success in your projects.
Here are some suggested points to consider when choosing an SR&ED firm:
1. Knowledge in your technological field:The scientific expert assigned to your project must be able to quickly understand the technological challenges in your field, as well as the elements of the business context. This facilitates discussions while ensuring the quality of the work produced. The expert must have excellent writing skills to communicate all the important elements of your projects.
2. Experience in SR&ED: the team must have extensive experience in the field, so as to be able to guide you effectively through all the stages with rigor, while fostering complementarity with your teams. This will enhance the value of current activities, while helping the company's technical people to develop their skills for future projects.
3. Trust, ethics and professionalism:the team must be highly professional in providing the advice that will grow your business while protecting your company's reputation with the tax authorities.
Before launching an SR&ED project, certain preliminary steps must be taken to ensure a successful launch.Although necessary, expenses associated with these pre-project activities are not eligible. However, it is necessary to document these activities to demonstrate that the project was launched after diligent verification of the state of knowledge in the field.
Here is a list of examples of typical pre-project activities (not eligible as SR&ED expenditures):
1. Marketing research: before investing large sums in R&D, it's a good idea to carry out marketing research in order to identify the sales potential and expectations of future customers or users. This data is extremely useful in guiding future R&D efforts. It may be a good idea to record this information in a "project financial justification". with financial indicators.
2. Review of scientific and technical literature: This research phase aims to establish the state of knowledge in the field, as well as the technological uncertainties of a potential project, i.e. the knowledge limitations that need to be overcome to raise the level of knowledge.
3. Expert consultation: It is advisable to consult experts and researchers to identify the resources available to deal with the technological uncertainties of a project. These may be expert consultants from the private sector, or researchers from universities or public research centers.
4. Intellectual property research: This complementary step aims to ensure that the project will not interfere with existing intellectual property. The data gathered may pave the way for steps to protect the resulting intellectual property and/or realign the project to avoid conflict with competitors.
5. Attempts to apply tools from current practice: before to undertake an experimental approach, it is suggested to validate whether anydesign software or manuals reference models in the field include sufficient data to dispel uncertainties.
The start of a project becomes official when a scientific or technological uncertainty has been identified. The good practice to apply is to describe this uncertainty in a "project plan" document, which may include, but is not limited to, the following elements:
1. Objectives in terms of the scientific or technological advances sought: these are respectively gains of knowledge in a field of science or concerning the technology in question. The gains targeted must go beyond current practice, i.e. the knowledge generally available in public sources and normally mastered by experts in the field. We suggest identifying the iperformance indicators (or measurable criteria) to be exceeded, or the new characteristics desired for the product or process under development.
2. Overall project planning and key deadlines: the planning The overall project plan can describe the main phases planned, the start and end dates for each phase, the human and financial resources to be provided, a description of the team and any other information that may be useful for managing a project.
3. Planned experimental approach: It is suggested that the project plan include a brief description of the planned experimental approach, i.e. the interactions under study with regard to the independent variables (the manipulable parameters) and the dependent variables (the control parameters) in future experiments.
After defining objectives for scientific or technological advancement, the next step review is the formulation of one or more hypotheses in response to the uncertainties initially identified. A hypothesis can be any idea about a new system configuration or technological principle or material/component arrangement, or a new idea for achieving the objectives formulated. There may be one or more hypotheses simultaneously or in multiple sequences over the course of a project. The good practice is to keep a record or documentation of the details of the hypotheses developed.
During the hypothesis formulation phase, several types of activities can be carried out:
1. Development of an experimental concept: in the case of a complex system comprising several subsystems or components, the of hypothesis formulation can be integrated into the development of an experimental concept. It is important to keep a record or documentation of the main assumptions made.
2. Detailed development of a test bench or prototype:
3. Conduct analyses or simulations to change the hypothesis(es):
3. Search for information or scientific/technological data to develop the hypothesis(es):
(the heart of the SR&ED process)
Running software simulations
Detailed concept analyses
Prototype production
Tests / Test plan / Test campaign
Scale models / test benches / prototypes
Experimental unit / pilot plant
Technical problem solving
Observation of phenomena / parameters
Mathematical analysis of results
Formulating relationships
Validation / negation of working hypotheses
Model evaluation / experimental design
Formulating conclusions
Formulating knowledge gains
End of project / project report
The SR&ED project ends when the experimental process has been completed or if the technological uncertainty initially identified (in the sense of knowledge limitation) has been dispelled.
If this is the case, the project team can begin production of the new product or process based on recognized practices.
However, activities in this phase do not qualify as SR&ED.
Submitting a claim for SR&ED credits involves many issues for a company, both in terms of the resources invested and the potential return. It is important to be well-prepared to ensure rapid acceptance of claims and/or rapid verification during audits.
Here are the key steps in preparing a tax credit file.
1. At the start of an SR&ED project or at the beginning of the fiscal year: it's important to be proactive by formalizing the start of a project, i.e. by documenting the elements of technological uncertainty (in the sense of knowledge limitations) and by setting up a project plan including the main steps involved in the SRED approach (see DE model).
2A. During the project process (technical follow-up portion): ensure that technical experts (project spokespersons) properly document SR&ED activities. The function of these documents is to support good project management, while at the same time serving as a means of consolidating the new knowledge acquired during projects. In addition, these documents are essential as evidence of the conduct of SR&ED activities and must be kept on file.
2B. During the project process (financial monitoring portion): during the year, it is also necessary for financial managers to keep track of expenses by maintaining appropriate records. It is also necessary to set up a system for tracking labor time and expenses (material consumed, subcontracted labor or research contracts, etc.).
3. After the end of the exercise: you need to gather all the technical and financial information required to complete the SR&ED tax forms for your territory.
AS - Accompaniment and Support: To ensure that the entire process is both straightforward and rigorous, we suggest that you call on our team, who will guide you through all the key stages of your project. This will enable you to carry out your projects efficiently, while saving time and maximizing benefits.