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.
Other articles by Bruce Madole in SRED Unlimited blog
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.Read more about SRED