Finding the Dough for Making Dough

Tips for making the most out of an underused government assistance program for research and development.

While it is far from secret and far from new, many Canadian companies have not taken full advantage of the federal government's Scientific and Experimental Development program (SR&ED, generally pronounced “shred”).

The program provides tax credits and outright grants for R&D carried out in Canada that will lead to new, improved, or technologically advanced products or processes. It is open to Canadian companies, including Canadian affiliates of multinationals.

Companies that perform qualifying work can apply to have this work considered under SR&ED, and if the application is accepted, all or part of the applied-for amount may be provided.

SR&ED is the largest single source of federal government support for industrial R&D, but is underused and discounted by many businesses. Companies may believe they do not perform work eligible for the program, that it is more trouble than it is worth, or that they have already squeezed as much benefit out of SR&ED as they can. In working with such companies, I have often found that they are mistaken. In fact, some 50 to 60 per cent of companies eligible for the program are not claiming for it, and if they are claiming, they are not maximizing what they could receive. Without knowing it, many bakers are able to gain benefit from R&D work that they are already doing. This includes the frequent need to augment or modify the machinery they buy. Far from being “plug and play,” many bakers find that equipment on the market needs to be adapted to their needs. Some are engaging in the design and building of machinery from the ground up, and this too can provide a wealth of SR&ED credits. The same goes for bakers who are developing new binding agents that meet market expectations, such as demands for healthy eating options. Much of this work is also eligible.

It is important to note that some types of R&D are difficult or impossible to make eligible for SR&ED credits. This includes most software. The same too goes for most work around flavourings and recipes and ingredient blends generally do not qualify for tax credits.

If the engineering and financial assessments are properly completed, the eligible company can be reasonably certain of receiving the money and credits expected. It's not even a lengthy process after the government assessment – the government turns around most claims in four to 12 weeks, with the average time being about six weeks. This is particularly useful if a company is in a cash-short position.

Here are some steps to success in an SR&ED program:
•     Maximize results by budgeting for R&D with assumptions of SR&ED in mind. This may allow the
company to engage in larger research projects, possibly testing more thoroughly.

•     While it would not make sense to undertake R&D just for SR&ED purposes, it may be wise to design the work in such a way that SR&ED is maximized. For example, it is possible to keep the SR&ED credits within the company even if the actual work is outsourced. This can be done by making sure that the risk or uncertainty is held by the company commissioning the work. The outsourced tasks would be structured in a way that the subcontracting company is given detailed instructions on the work to be done, and then asked to report back its results, with the primary company then directing it as to the next step.

•     The R&D work does not have to be “successful” from a business perspective, to be eligible for credits. A project can be a failure from a commercial and scientific point of view, and still be eligible for SR&ED. This feature alone frees the company to do leading-edge work in the view of “nothing ventured, nothing gained.”

SR&ED can be a good source of cash and tax credits for the company, and may not require any changes at all in “business as usual.” It has the benefit of pushing companies to do R&D work – and in today's global economy, it’s vital for companies to invest in their future through doing just the kind of work that the SR&ED program is designed to encourage.

Phil Iorio is a partner in the assurance and advisory practice of Mintz & Partners LLP. He can be reached at 416-644-4398 or e-mail at phil_iorio@mintzca.com.