Dealing with technology? You might be eligible for government funding

SR&ED (Scientific Research & Experimental Development) is an incentive program by the Canadian government that refunds companies involved in Research and Development (R&D). (See the information about the program on the CRA website.) Canadian companies that spend money on creating or modifying products or processes through experimenting are eligible for SR&ED. Any company that deals with technology (software and hardware development, machinery, printing etc.) may qualify. If you created an entirely new industrial process or improved an existing one, if you took a database driver and rewrote it so its performance doubled, if you came up with a fuzzy logic algorithm to facilitate scheduling - all of this may be eligible. Innovation, uncertainties you overcame, and technological advancement are the criteria for eligibility. Even failed experiments may qualify. Non-Canadian owned companies also qualify, if they pay salary in Canada.
The SR&ED program is available to companies involved in Research and Development (R&D). Eligible expenditures include your time, employee and subcontractors labour, materials and equipment. SR&ED money is given as a refund for work already done.
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Accidentally, or on Purpose

By Bruce Madole

It really drives me crazy when companies make decisions that accidentally limit their potential for SR&ED – or eliminate the possibility of claiming SR&ED altogether.  Any in-house SR&ED program exists to serve the needs of the business, not the other way round.  Any external consultancy exists, likewise, to serve the best interests of the client.  If a company has decided to do something that is detrimental to the potential for SR&ED, so be it – but if the decision is not an informed decision, then I feel as though I have failed in some way.
SR&ED is a complex program, reaching across many parts of an organization, and likewise, influenced by decisions taken in many different areas.  Companies may too easily make decisions on matters without understanding SR&ED impact.  Occasionally, those impacts may be considerable, with the potential to undermine or offset the benefits implied in a business case.

Example one:  contract terms
Consider, for example, a decision about the technical development of a new, technically risky proposed system.  Unsure about whether the sought capabilities could be developed in house, and assuming that commercial off-the-shelf (COTS) solutions could not address the problem, a company might well decide to limit its risk in proceeding with development by agreeing to a firm fixed price contract with a supplier. It’s a proven approach to managing project risk.
That such a contract would prevent filing a SR&ED claim for the costs of the work may not be material to the decision about risk – but the potential tax credits recoverable might equally well have been understood as a mitigation of risks, and weighed in the balance.
A fixed-price contract “ceiling” would reduce the impact and risks of the over-run, just as penalty clauses might offset the risks of delays, but the possibility of a total failure would exist regardless. The impact of such a failure would have to be mitigated by other means: what does the business do, if the vendor can’t deliver, assuming they still need those capabilities?  Start over?  Lawsuits? Both?
Filing a SR&ED claim might have been useful as a way to mitigate some of the costs of the failure, if the firm fixed price contract terms had not been used. Investment tax credits recoverable might have proven a useful source of supplemental funding for the essential innovation. Thus, the choice of a contract and procurement approach has become a limiting factor in a project without anyone ever consciously making a decision about SR&ED.
Tough luck, that.



To be continued.

Bruce Madole

Other articles by Bruce Madole in SRED Unlimited blog