Let’s just get the cat right out of the bag: the Scientific Research and Experimental Development (SR&ED) Tax Credit program is a bit confusing. Okay, it can be more than just a bit confusing. Even after reading through a multitude of resources available to learn about what SR&ED is, the how and why of the SR&ED process, and determining SR&ED eligibility, it is still understandable to feel lost about whether a project or certain project costs can be eligible for the SR&ED tax credit program.
You’re not alone if SR&ED remains a mystery to you as there are hundreds upon hundreds of articles online explaining what the tax credit can be used for. While it can feel quite complex, it typically isn’t so. If you’re unsure, it’s always worth reaching out to a team of professional tax and funding consultants to see if a project or project costs can qualify for SR&ED.
In the following sections, we will discuss six of the most common misconceptions regarding the SR&ED tax credit. Many Canadian businesses simply do not take advantage of SR&ED funding because they believe common myths that their project must be a total innovation to their industry, but this, along with other misconceptions, is simply not the case.
Six of the Most Common SR&ED Tax Credit Misconceptions
“Our project is not eligible for SR&ED because it doesn’t revolutionize the industry”
Perhaps the top misconception of accessing funding via the Scientific Research and Experimental Development (SR&ED) tax credit is that businesses believe they must be revolutionizing a product, process, or system within their industry. This is false.
The truth is that the SR&ED program isn’t only for “revolutionary” development projects. What is considered “routine” for one business isn’t necessarily so for another, and industry capabilities differ widely too. Many SR&ED claims are about incremental improvements working towards an advancement. If there is progress being made towards an advancement required to develop a new or improved product or process, that may be SR&ED eligible.
A SR&ED eligible project need not be a cutting-edge innovation, it can be consistent attempts at improving a product, process, or system. This can include incremental improvements to existing processes too, such as improving a process for reducing emissions or improving consistency for time savings.
“Our project is not eligible for SR&ED because it’s not the first-of-its-kind in Canada”
As an addition to the previous misconception, Canadian businesses seem to also believe that SR&ED projects must be one-of-a-kind. This, too, is false.
First, SR&ED projects don’t need to be unique to be eligible and even if they did, they need much more than being the first of its kind to be eligible.
A project eligible for SR&ED may have been done before but in a different industry, or the findings are not public domain, so it can most definitely still be eligible for SR&ED.
The truth is that whatever prior project may have been built or done before for SR&ED, it’s important to consider that the way things behave with other variables in different environments can be entirely different, and thus constitute as its own project. There are many examples of new knowledge needed for different environments, but for comparable projects.
“Our project is not eligible for SR&ED because we weren’t successful”
Since a project doesn’t need to be successful to be SR&ED eligible, it is false that only success is awarded.
The truth is that a SR&ED project may be eligible for tax credits if your business has made or is making progress towards a goal. Work that is “for the purpose of the advancement” is SR&ED.
That is, if your business is undertaking a project and it’s not successful, you have still obtained knowledge of what didn’t work and why. Likewise, if your business runs into a technological difficulty, then you are undertaking work in a gap of knowledge and that is also SR&ED eligible.
Often a strong indicator of SR&ED is that the project has faced challenges and needs other ways in which to achieve its intended progress goals.
“We aren’t eligible for SR&ED because our competitors already did this”
Projects eligible for SR&ED can still receive tax credit funding if the information and discovery from other projects, like those of competitors, is not publicly available.
In relation to a previously stated misconception, a SR&ED project need not be the first of its kind. It can be eligible for SR&ED for several reasons even if it has already been completed in some other capacity, such as in a different sector.
“SR&ED eligible projects need to be complete to prepare an application”
It is false to believe that SR&ED projects must have been completed to apply for or receive tax credits.
The truth is that SR&ED is not driven by the start or end date of a project. SR&ED projects can span years. The expenditures need to be claimed in the year in which they are incurred.
It is also important to note that SR&ED eligible projects can start before an application, while some aspects can start after. This doesn’t impact the SR&ED claim.
“We can’t claim SR&ED because we’ve received a grant for this work”
Perhaps one of the most important things to know about offsetting project costs is that most government funding programs allow stacking with SR&ED tax credits.
It is important to plan a strategic government funding approach for project expenses to maximize on increased cashflow contributions by stacking government funding programs for varied portions and expenses of a project.
The significant factor is that each program must respect one another. If a project activity/expenditure has been covered by grant funding, in most cases the expenditure can still be claimed for SR&ED, but the funding received in respect of SR&ED will be applied to reduce the qualifying expenditure. Having said that, a limited number of programs do not allow stacking with SR&ED and the expenditures can only be claimed in one place. Even in these relatively uncommon scenarios, SR&ED can still be used for other expenditures of the same project that the grant does not cover and vice versa because these programs often have different expenditure bases.
Stacked funding is better than only accessing one program which is why it’s important to build a strategic plan with the help of professional consultants, such as those at Ryan, to maximize funding potential and obtain thorough funding support.
Is Your Business Project Eligible for SR&ED? Find Out!
If you’re still confused after reading through these SR&ED misconceptions, the biggest takeaway for Canadian businesses should be this: do not self-assess your project as ineligible!
If you have doubts that your project or certain project costs are not eligible, your doubt can be assessed by a tax professional such as ones we have on the Ryan team.
If you’re interested in SR&ED tax credits, connect with our team to learn more about whether your business could be eligible.