SR&ED Frequently Asked Questions, Answered by R&D Partners Experts

Introduction

The federal scientific research and experimental development (SR&ED) tax incentive program (ITC) is one of the most generous in the world. As the largest federal funding program in support of business R&D in Canada, it awards more than $3 billion annually to companies that conduct eligible R&D activities. Compared to other programs, SR&ED is particularly accessible since it is industry agnostic and does not require businesses to be revenue-generating to be eligible for funding. However, its application process can often seem daunting – especially for new claimants – and its requirements are not always clearly understood.

We get questions about SR&ED all the time, so we decided to round up some of the more common ones and have the experts on our team answer them.

The Experts

Debbie Frail, P. Eng., MBA

Debbie has spent her professional career managing engineering, operations, and project teams in several technology fields. For over 20 years, she has successfully worked with clients ranging from entrepreneurs to multinational corporations to prepare and defend SR&ED tax credit claims. Debbie works primarily in the manufacturing, automation, and transportation sectors.

Patrick Campana , P. Eng., MBA

Patrick has been managing engineering and project teams in several technology fields for over 18 years. Patrick specializes in preparing and defending SR&ED tax credit claims for companies of all sizes operating in the telecommunications, software, and manufacturing sectors.

The Questions

How do I know if my project is eligible for SR&ED?

Patrick: SR&ED eligibility is based on a fundamental question: are you solving a technological uncertainty? If the current state-of-the-art technology available to you does not allow you to reach your technological objectives with a straightforward and known approach, your project is likely eligible for SR&ED tax incentives. However, the answer may not be that easy to ascertain depending on the situation.

Beyond technology specific criteria, the company’s size and experience in the field must be considered. Companies with extensive proprietary knowledge may have to push their experimental development efforts further than a less experimented company might need to do to qualify for the SR&ED program.  Conversely, a small company entering an unfamiliar area of technology for them may need to first go through a learning curve before reaching the state-of-the-art level of competency from where they can start working with the SR&ED program.

Ultimately, there is no one-size-fits all answer here, and each project still has to be evaluated on a case-by-case basis to determine eligibility.

Want to know more about how to evaluate your eligibility for SR&ED? Read one of our previous articles all about the topic here

What is the key to a successful SR&ED audit?   

Debbie: First, proper documentation is key. Keeping accurate time sheets and recording material and sub-contracting expenses is essential to a successful SR&ED claim.  Additional substantiating documentation to demonstrate the work done is also important. This can include records of tests carried out, analysis of results and conclusions made, meeting minutes, invoices, correspondence, modifications made to prototypes, and other contemporaneous information that can support the claim.

Additionally, it is important to be well prepared and knowledgeable as to the SR&ED program technical and financial tax requirements. For example, you can only claim the portion of an employee’s salary that is proportional to the amount of time they spent on eligible SR&ED activities – and not their entire salary for the year – unless they spent at least 90% of their time on activities that are eligible for SR&ED.

Want to know more about SR&ED audits and how to face them? Read our article dedicated to the subject here. 

What is the best way to track my project activities?

Patrick: The CRA doesn’t ask for any specific ways to track the project. The most important thing is to always have dated documentation, and there are a few ways to make it as simple and useful as possible.

Tracking individual tasks with a project management tool like Jira is not always the most helpful: this keeps the focus on low-level individual tasks and often lacks linkages to claimed SR&ED activities. Using an overall project map that gives a bird’s eye view of the project – its stages, who is assigned to which tasks and the general timeline – can be a simple and very useful tool. It can help anyone who is not familiar with your project – like a CRA auditor – understand it as a whole.  It is also a valuable resource to identify and justify which expenses can be claimed.

How should SR&ED program time be tracked? 

Debbie: You can only claim the salaries directly related to SR&ED eligible activities. This would exclude work that does not directly support experimental development, such as routine software development and routine quality control testing. It is important to track both eligible and non-eligible SR&ED program time to ensure you can demonstrate full work periods, and also to enable you to reclassify time in the event eligible SR&ED program time was improperly classified.

The worst way to track your time is of course to not track it at all: it often leads to either a refusal or underestimation of the time spent on eligible SR&ED work. This means that you are potentially losing money you could have been entitled to.

We recommend and work with three different kinds of time tracking systems: 1) intelligent spreadsheets we have developed for very small R&D teams; 2) our very popular, automated pull time tracking solution (contact us for a demo!) that requires very little training or work; and 3) established, customized web and ERP time tracking tools. This last option works best in large enterprises with well installed systems and methods.

How do I differentiate between SR&ED hours and non-SR&ED hours in my timesheets? 

Patrick: In most cases, it is not productive to ask individual contributors to classify their work as SR&ED or non-SR&ED in their timesheets, unless a project can be clearly circumscribed and identified as SR&ED work ahead of time.

Often, when a project encompasses both SR&ED and non-SR&ED activities, the final distinction can only be made retroactively, once one can determine what work went beyond the current state-of-the-art in an attempt to solve a technological uncertainty. Therefore, the important thing is to consistently label activities so they can later be easily retrieved and included in your SR&ED claim.

Artifacts naturally generated throughout the duration of the project – if they are dated and identify contributors and associated labels, will efficiently corroborate timesheet data down the road.

What is the best way to track my material expenses? 

Debbie: We often suggest that clients set up specific G/L codes for material and sub-contracting expenses that are related to a SR&ED claim in their internal accounting system. Tagging them and keeping track for when the claim is filed – and in case of audit – is crucial.

What should I do if I already received government funding for the project? Am I still eligible for SR&ED?

Debbie: Yes, you are still likely eligible for SR&ED even if you received other government funding – a grant, for example – for your project. However, you have to be aware of the stacking limits and of how the government aid you received or are expected to receive could reduce your eligible SR&ED expenses – or even your ability to claim the SR&ED tax credit.

The important element is understanding the stacking limits of every source of government funding, as well as the allowable interactions between these sources of funding.  Generally, more funding and funding programs are preferable. However, the cost of applying for, tracking, and reporting on the funding programs should be taken into consideration, as at some point additional funding programs will have diminishing or negative net funding returns.

Want to find out more about what to keep in mind when you apply for potentially competing government funding programs? Read our blog post all about it here. 

 

If you have any questions about SR&ED that this blog post left unanswered, or if you are considering submitting a SR&ED claim, don’t hesitate to contact our team at:  1-800-500-7733, ext.2

 

Disclaimer: The views expressed in this article are provided for informational purposes only. Iis not intended to nor can it replace the evaluation of your specific SR&ED claim by a dedicated consultant. 

Intro to the Tax Credit for the Production of Multimedia Titles

The tax credit for the Production of Multimedia Titles has been in place since 1996 and was created to develop the multimedia sector in Quebec and make the province an attractive place to develop video games and interactive digital media applications. A variety of interactive media products can be considered eligible for this credit, with varying rates.

This credit is refundable and applies to the salaries of eligible employees or subcontractors for work done on eligible multimedia productions in Quebec. This work can include any stage of the production, with activities including initial design, writing, game development and user community management all being possibly eligible.

In this article, we will take a deep dive into Quebec’s Tax Credit for the Production of Multimedia Titles and go over the details of the funding as well as the specifics of the eligibility criteria.

Eligibility Criteria

First, this tax credit can only be claimed by businesses that meet specific criteria and that undertake eligible work. The work also needs to be done by eligible employees or subcontractors in Quebec. Therefore, several criteria must be met to claim the credit.

To be eligible for the Multimedia Tax Credit, companies must operate a corporation that has an establishment in Quebec and be the main producer of an eligible multimedia title. Only the producer of a title may claim the credit, so if a title is being developed in total or in part at the request of another corporation, Investissement Québec will not recognize the corporation as having produced the title.

A corporation that produces a portion of the eligible multimedia title on behalf of the main producer of the title can also claim the tax credit on the portion that they worked on, but only if the main producer of the title does not have an establishment in Quebec.

Eligible labour expenses related to production work can often be claimed in full – excluding any other source of government or non-governmental funding covering the same expenses – for salaried employees and subcontractors not at arm’s length. Eligible production work done by a subcontractor at arm’s length can be claimed at 50% of its total cost. In all these cases, the employee or subcontractor has to be based in Quebec for the tax credit to apply.

Eligible production work includes all activities necessary to design and produce the title, from the beginning of the design stage and continuing indefinitely, including after the title is initially commercialized. This includes principal development of the title’s interactive structure, architecture and programming, the core design of the title’s interactivity loops, and the production of the title’s content – art, text, scenario, sound design, music and more.

Activities necessary for further development and improvement of the title after it has been commercialized are also eligible. This can include developing and maintaining a community of users who can provide feedback on issues, additions to a title post-commercialization and the analysis of quantitative data to optimize the title.

Project Eligibility

Corporations can claim the Multimedia tax credit if they produce an eligible interactive digital media title in Quebec and intended for commercial release. Titles that are produced for internal use are not eligible, they must be available for sale. Interactive digital media titles can include video games, educational software, professional simulators, and more.

To be eligible, projects must include at least 3 of the following 4 media: text, sound, fixed images and animated images.

One important thing to keep in mind is that interactivity must be integral to the product’s functionality. Most – if not all – of the interactive elements should be contained within the electronic medium.

Investissement Québec specifies that the types of media – text, sound, fixed images and animated images – must be present in “appreciable quantity”, and they must all be an integral part of the functionality of the game, mobile app or another type of multimedia title. The loss of one of the elements should fundamentally affect the functionality of the software.

In addition to the basic eligibility criteria – the title must contain at least 3 of 4 types of media – the title must meet Investissement Québec’s criteria of interactivity within the electronic medium. This is evaluated with 3 main criteria: feedback, control, and adaptation.

Feedback is measured by the response given to the user – or player – of the title whenever an action is taken. This could be an audiovisual cue that an action has been completed, or a text-based comment on the quality of an answer given by the user for a puzzle, or other ways the title indicates a user’s performance in a level and suggestions on how to improve, for example.

Control is measured by the degree of influence the user can have on the electronic medium and its content. Examples of control include moving a character around, making choices between options provided by a game, or implementing a strategy to achieve a goal.

Adaptation is measured by the degree of variability of the actions available to the user of the title depending on specific situations. The presence of specific events that can only be engaged according to a user’s skill level or the skills they selected on a decision tree as they progressed through a game can satisfy this criterion.

Investissement Québec also evaluates the scenario of the title: what reason is the title giving the user to interact with it? This criterion can be met by having a series of objectives or a storyline.

All these elements work together and drive the criteria behind “interactivity” between the player and the multimedia title. While they are used in a broad sense to determine whether any digital media title or application available electronically is eligible as a “multimedia title,” in practice the tax credit is principally intended for video game production activities.

Tax Credit Rates

This refundable tax credit can fund up to 37.5% of eligible labour expenditures. However, different maximum amounts and percentages will apply depending on specific circumstances. The main factors that affect the tax credit rate and funding amounts of this program are the language in which the interactive title is released, the nature of the title – is it entertainment or educational? – and who conducted the eligible development work.

In the vast majority of cases, the base tax credit is 30% of eligible labour expenditures on an eligible multimedia title according to the criteria discussed above. Claimants can also receive a bonus 7.5% tax credit on a commercialized title if a French-language version is available at the time of its release. It is important to note that a corporation could not launch a title exclusively in English – or any other language – and then add French text or audio after it is released and claim the full 37.5%. Because the title was not available in French at the time of its release, the company could only claim up to 30% of labour expenditures in this case.

It is important to note that a lower tax credit rate of up to 26.25% applies to titles in any language that are intended for professional training purposes only.

Maximum Funding Amounts

Once we know the company’s overall tax credit rate for the project – 37.5%, 30% or 26.25% depending on the title – it is applied to the eligible labour expenses to calculate the actual amount the company can receive claiming the credit.

Three scenarios can apply depending on who conducted the eligible development work.

First, as mentioned earlier, production work done by a subcontractor at arm’s length can be claimed at 50% of its total cost. The maximum refundable tax credit amount, therefore, corresponds to 37.5% of half of the contract value in this case.

When the work is done by an employee or a subcontractor not dealing at arm’s length with the company claiming the credit, the eligible labour expenses are usually capped at $100,000 per employee or subcontractor per year. If an employee’s salary or subcontractor’s fee is lower than $100,000, the entire salary is therefore eligible. This means a maximum possible refund amount of $37,500 per employee in most cases.

That said, there are some exceptions. This is because, for employees and non-arm’s length subcontractors, the program allows companies to exceed the $100,000 of salary expenses per year for a certain number of eligible individuals. The entire salary of even the highest-paid employees can then be considered an eligible expense, even if it is well over $100,000 a year, making the potential refund per employee more than $37,500.

The number of employees who can have more than the first $100,000 of their annual salary be considered an eligible expense is determined by multiplying the total numbers of employees and non-arm’s length subcontractors for which the company is claiming the credit by 20% and rounding the number.

Application Process

While it is granted by Revenu Québec to incentivize companies to develop video games and interactive media products in Quebec, it is important to note that much of the application process for this credit first goes through Investissement Québec, not RQ itself.

The application process for this tax credit is divided into two parts. Companies must first obtain a certificate of eligibility to assess the eligibility of the title itself, followed by an attestation of production work, where IQ will certify the number of eligible hours worked by the corporation on the title. Both are issued by Investissement Québec. The first certificate confirms that the multimedia title qualifies for the credit and only needs to be obtained once, while the production work attestation has to be renewed for every taxation year in which the corporation claims the credit.

 

How R&D Partners can help  

Still have questions about this tax credit? Contact Dominik Klein at [email protected]

 

Additional Resources:

Investissement Québec program page: https://www.investquebec.com/quebec/en/financial-products/smbs-and-large-corporations/tax-credits/production-of-multimedia-titles.html

Detailed program factsheet: http://www.investquebec.com/Documents/qc/FichesDetaillees/FTTITRES_general_en.pdf

Determining SR&ED Eligibility by Industry and Project Type

Introduction:

Prior to the COVID-19 pandemic, Ibis World predicted that, over the next five years, the engineering services industry in Canada would begin to grow once more, having contracted following a drop in the price of crude oil in 2015. The field of biotechnology was similarly expected to expand. Though government assistance programs will help offset the impact of the COVID-19 pandemic, it’s unlikely that either industry will meet their original projections. Nevertheless, programs like SRED still exist to support activities within these industries, provided businesses know how to claim them.

Resources that describe general SR&ED eligibility criteria are abundant, but it is more difficult to find information related to specific industries or project types. For example, if you are in the aerospace industry and qualification testing takes up most of your fiscal period, how eligible is this activity? In this simple guide, we break down some key concepts and questions that may help you discern between eligible and non-eligible activities in certain industries.

 

Aerospace:

Often, the recipe for R&D and technology uncertainty in the aerospace industry comes from the fact that the field is stringent, regulated, and competitive . Technological objectives are constantly changing and becoming increasingly challenging to meet. Further, these objectives are often competing (e.g., reduced costs with increased performance) and demand experimental development to determine whether or not they can be met.

If your project is fairly mature and undergoing various rounds of certification testing, determining eligibility can be trickier. However, it is also worth noting that uncertainties can often be rooted in the sensitive nature of engineered goods and services being directly utilized by humans with serious safety implications. In the aerospace industry, durability and safety are typically expressed and certified under the following terms: 1) airworthiness (flight has been certified to be operative in air with passengers) and 2) flight availability (expressed as the probability of a fault occurring every flight hour, which must meet federal standards). As such, if there are uncertainties related to flight performance and safety that have yet to be understood and resolved, SR&ED continues, and related project activities could be eligible.

If you are able to answer “yes” to any of the following questions about your project, then related activities could be SR&ED eligible:

– Are there remaining tests required to prove the flight availability of your newly developed aerospace component (e.g., engine control software) in several flight and environmental scenarios?

– Is there still technological uncertainty that requires experimentation to determine whether objectives defined at the outset can be achieved?

– Are you still learning about interactions between control laws and flight performance in various flight maneuvers and environmental scenarios?

In addition to these scenarios, unexpected failures may arise during any stage of development and certification, necessitating further experimental investigation and SR&ED eligible activities.

Electrical Engineering, Electronics, & Control Systems:

Many widely-known theoretical tools have been established to explain and model phenomena in the areas of electronics, control systems, and electrical engineering . However, novel application of these theoretical tools in various devices and contexts may uncover complexities that necessitate experimental development, as modeling tools alone cannot accurately predict outcomes. What’s more, certain modeling efforts may be too computationally intensive, implying large costs and extensive development times. From these limitations, an opportunity for SR&ED occasionally arises as newer algorithms and modeling methodologies are developed, or as assumptions are made that must be experimentally evaluated. When developing new material systems and structures for semiconductor devices, antennas, and flexible transmission lines, for example, and subjecting these to uncommon signal frequencies and extreme environmental conditions, characterization activities that attempt to fill in gaps in the available knowledgebase could be eligible.

If you answer “yes” to any of the questions below, you could recover some of your R&D costs through funding programs like SR&ED.

– Are you developing new tools and algorithms to model otherwise complex and computationally exhaustive phenomena?

– Are you attempting to advance the state-of-the-art in microwave theory, signal processing, or non-linear control theory?

– Are you exploring new materials, processes, and leveraging quantum and electromagnetic theories to build next-generation semiconductor devices?

– Have you presented the theoretical basis to your current development at an IEEE conference?

– Does your project also add new knowledge to the fields of sensing, physics, chemistry, or signal processing?

 

Biomedical & Pharmaceutical Sciences:

Drug development and medical device development can be an expensive, multi-year process, but the good news is that many of these costs can be offset by several government-backed funding programs in Canada. From a SR&ED point of view, research and development in the life science sector is eligible on many fronts, compared to other technological sectors. For example, it is often clear what the established state-of-the-art is due to a vast collection of up-to-date publications concerning syntheses and clinical trials, the systematic, scientific approach demanded by SR&ED, and the uncertainty at different stages of development related to the efficacy, safety, and performance of chemical compounds and devices that interact with the human body. Given this, if you answer “yes” to the following questions, you’re likely eligible for SRED:

– Are you developing chemical compounds that interact with the human body?

– Are you dealing with scalability issues in large-scale synthesis?

– Are you building in vivo medical devices?

 

AI/Machine Learning:

Growth in the AI/Machine Learning industry has been rapid and widespread over the past few years. Accordingly, research institutions and industries alike that leverage AI/Machine Learning continue to be rewarded with lucrative funding opportunities. Naturally, the competition for securing these funds is also growing, and the bar continues to rise, especially where SR&ED eligibility is concerned. Nonetheless, if you are advancing the field of AI/Machine Learning or utilizing it to supplement your products or processes, we identified a few questions below that may help you better understand how eligible your AI/Machine Learning based project may be. If you answer “yes” to any or all of these questions, your projects are likely eligible:

– Would some of your work be potentially publishable in top-tier conferences in machine learning or directly advances a specific machine learning topic from a published resource?

– Are you dealing with strict performance requirements that, for example, encourage you to develop scalable and untested models and algorithms that can work with less data?

– Would your AI efforts and advancements impact another field of science like biology, chemistry, or agriculture?

 

Manufacturing:

Though SRED eligibility may be less common where traditional manufacturing is concerned, opportunities could arise when significant improvements to a product or existing process are sought, especially if artificial intelligence or advanced 3D printing can be leveraged.

If you answer “yes” to any or all of these questions, your manufacturing projects may be eligible:

– Are you attempting to increase production efficiency or adhere to more strict environmental regulations by applying technologies or materials that would not be conventionally used for your application?

– Additionally, does this require extensive experimental iterations?

– Are you adding new knowledge to other fields of science and technology, for example, processing advanced thermoplastics?

 

Conclusion:

It is important to examine both the experimental tasks and industry in which they are being undertaken to evaluate the eligibility and risk of a potential SR&ED project. Certain industries lend themselves well to SRED claims, while others are less obvious and more problematic. Having said that, we have successfully claimed SRED in some of the most unlikely industries, and there are a number of elements that can be incorporated into the process of filing a claim that will increase its chance of success. Please reach out to us if we can help you navigate the eligibility of a potential claim and ensure that all the possible steps are taken to maximize it and reduce the related risk.

 

Budget 2019: What the SR&ED Changes Really Mean