Scientific Research and Experimental Development in Agriculture
By Mike McCreight, Partner & Greg Skinner, Sr. Manager
Country Guide
February 2009
As the agricultural industry market becomes increasingly competitive, farmers need to be more innovative in the way they conduct business. Adding innovation can make your business more profitable and in addition, some of your costs quite likely will qualify for a tax credit. Through tax credits, the federal government’s Scientific Research and Experimental Development (SR&ED) program rewards Canadian businesses that are forward thinking in their everyday businesses activities, who develop new or improved technologically advanced products or processes through systematic experimentation efforts.
Many farmers already take part in what could be considered qualifying research and development activities, including breeding, nutrition and feed projects, custom equipment development, energy research, and general innovations. The important point to remember, however, is that you must make a claim to obtain the benefits.
The main issue when applying the SR&ED rules is determining whether a specific activity qualifies as scientific research or experimental development. You could be eligible for tax credit if you are developing a new product/process; improving an existing product/process, developing improvements to the environmental impact of your agricultural operation, such as reducing pollution or waste.
To better outline just how SR&ED tax credits may play a part in your farming establishment, real-life examples are laid out below.
Example 1: Plant Breeding and Seed Industry
Activities such as breeding or combining different genes to obtain improvements in various traits or characteristics of the end product (eggs, poultry, pork, beef, seeds or plants) may qualify for SR&ED credits. In order to improve yield and produce the greatest quantity without compromising quality and simultaneously achieving the lowest cost, genetic experimentation must take place. Deciding which steps to take in the future is dependent on detailed tracking of the environment and traits that follows, which is meant to ensure positive growth in the desired traits in order to decide which steps to take in the future.
Eligible costs through the SR&ED program would include the time taken to conduct the experiments, record data, analyze it and determine the next course of action. As genetics are a dynamic process and are ongoing in nature, it is typical that outcomes of the research activities take place over long time frames.
Example 2: Greenhouses and/or Farms
In this sector, you might be eligible for tax credits through your SR&ED work if you are trying to develop:
- Optimal growing regimes and protocols to manipulate the growth of plants that naturally grow in Southern or tropical conditions to grow and acclimatize in our Northern climate
- Environmentally friendly alternative pest control management regimes, and testing their efficacy instead of using traditional environmentally hazardous chemicals and pesticides; or
- Alternative growing regimes and protocols to manipulate or significantly shorten the growth period (i.e. quicker to maturation and marketability) without affecting the quality of the plants.
Example 3: Equipment Modifications
One example of this would be retrofitting an existing piece of equipment to use for a different function than its originally intended function; such as using a harvestor that formerly would harvest corn or soy beans when they have dried out, to harvest different crops in their lush vegetative state could result in blockage or plugging the old equipment. The subsequent redevelopment of the working components (i.e. rake, auger, screw etc) and mechanical processing system, as well as the testing and supplemental redevelopment, can potentially be SR&ED eligible.
Example 4: Bettering Environmental Farming Practices
If your farming operation has been investigating this subject, you might also be eligible to qualify for SR&ED credits. Many operations have recently looked into decreasing their amount of methane production on an annual basis. In an effort to meet these goals, many are considering bio-digesters to manage environmental responsibility and the creation of the by-product, bio-gas, which creates future savings opportunities, as this gas may be used in place of natural gas or propane.
Another SR&ED-qualifying activity may include the use of wind turbines on the farm. These convert the kinetic energy in wind into mechanical energy, which can be used to power your farm and/or sold back into the city power grid.
While you may incur a significant cost in the beginning, the SR&ED credits coupled with power or gas savings over time, will ultimately pay for themselves.
Check Offs
Until recently, farm producers who made financial contributions to agricultural organizations for SR&ED by way of check offs, levies, or cash assistance were not able to access the ITCs because of specific legislative provisions governing the program. However, the Canada Revenue Agency (CRA) has initiated a process within the current legislative framework by which producers may now access ITCs earned through contributions made to agricultural organizations that fund SR&ED.
Around 2002, the CRA allowed farm producers to access ITCs earned on contributions made to agricultural organizations that fund SRED. These third party payments must be made to approved associations of which farmers are members, where the associations act as agents for the producers in matters relating to SRED. In effect, all SRED transactions by agricultural organizations will constitute a transaction made by producers. Contributions will then be considered as a payment directly from the producers to the actual performers of the SRED.
Mike McCreight is a chartered accountant and partner at BDO Dunwoody in Windsor, Ont. For more information, e-mail mmccreight@bdo.ca or visit the website www.bdo.ca.
