The Scientific Research and Experimental Development (SR&ED) program continues to be the single largest source of R&D funding in Canada, despite recent changes.
These changes included the elimination of capital (equipment) purchase or lease costs, and the reduction in overhead and contract payments. While this had un-doubted implications on Canadian food and beverage processors, SR&ED funding continues to maintain some clear advantages over other grants and incentives programs. These advantages include:
Key eligibility criteria
All projects must meet three SR&ED eligibility criteria:
Whether a result or objective can be achieved, cannot be determined based on the scientific or technological knowledge generally available.
A planned approach that includes analysis, testing of proposed solutions, recording of observations and interpretation of results.
New knowledge gained as a result of the work done, that advances the existing science and technology knowledge base, as opposed to advancing the business.
Companies involved in food and beverage processing are faced with a number of challenges that include regulatory pre-requisites for food safety and the continuing need for new product development to meet ever evolving lifestyle choices. The necessity to make technological advancements, therefore, is highly pertinent and the SR&ED program can play a significant role.
Such advancements include the establishment of new ingredients or additives in order to enhance current recipes for commercialization. As an example a company wanted to scale up their organic, gluten-free meat sauce recipe to a large scale industrial batch. However, the original recipe contained meat protein that would require the addition of a preservative for shelf life stability in a large scale batch. The company was not aware of an organic, gluten-free, all natural meat protein substitute. The advancement in this case is the ‘establishment of an adequate animal protein replacement' (technology advance), not the ‘development of a new organic meat sauce' (business advance).
Regulatory pre-requisites also deliver plenty of opportunity for food and beverage processors to meet the three key criteria. As an example, a company needed to meet internal product temperature within a set period, as per Canadian Food Inspection Agency (‘CFIA') regulations. This required an elevated processing temperature; however, the elevated temperature resulted in excess product shrinkage and a dry texture. First attempts at improving moisture retention at the elevated temperature failed. The advancement, in this case would be the improvement of moisture retention at elevated processing temperatures, not the meeting of CFIA regulations.
SR&ED eligible expenses must be directly associated with eligible activities, as an example:
- Wages of all employees involved in the SR&ED activities (hours employees spent performing activities)
- Overhead (can be calculated as a proxy/% of wages, or traditionally/ add all incremental overhead costs associated with SR&ED activities vs. commercial activities)
- Material consumed (must be rendered valueless during SR&ED/ scrapped)
- Subcontracts (not including taxes, 80% of the subcontract invoice can be claimed for SR&ED)
Two federal SR&ED investment tax credit rates exist:
- General rate of 15%, and
- Enhanced rate of 35%.
The enhanced rate is for eligible Canadian Controlled Private Corporations within established taxable income and capital thresholds. The rate will be determined by the claimant's previous year's taxable income. The benefit of preparing a SR&ED claim may depend on whether the company is eligible for a general or an enhanced rate. As an example, an Ontario based company has determined that it is worth their while to pursue a SR&ED claim if they could generate a minimum of $50,000 in SR&ED credits.
SR&ED — cost and benefit to preparing a claim
Two federal SR&ED investment tax credit rates exist:
- General rate of 15%, and
- Enhanced rate of 35%.
The enhanced rate is for eligible Canadian Controlled Private Corporations within established taxable income and capital thresholds. The rate will be determined by the claimant's previous year's taxable income. The benefit of preparing a SR&ED claim may depend on whether the company is eligible for a general or an enhanced rate. As an example, an Ontario based company has determined that it is worth their while to pursue a SR&ED claim if they could generate a minimum of $50,000 in SR&ED credits.
To generate a min of $50,000 under the Enhanced Rate
e.g. 4 employees at $50.00/hour working for 2 months on SR&ED eligible activities + $6,000 in materials + $5,000 in contracts
To generate a min of $50,000 under the General Rate:
e.g. 4 employees at $50.00/hour working for 4 months on SR&EDeligible activities + $8,000 in materials + $5,000 in contracts
(all numbers above are approximations)
SR&ED — important considerations for success
Ensuring the success of a SR&ED claim requires maintaining accurate documentation and clearly articulating the technological uncertainty and the technological advancement within the SR&ED technical reports. Documentation created at the time the work is done is especially important in cases where the SR&ED activities are taking place at the same time and on the same line as production/commercial activities. In this case, the incremental process improvements claimed as SR&ED need to be carefully documented and delineated from the commercial activities.
The outlook for food and beverage processing
While food and beverage processors may have been affected by the changes to the SR&ED program, it maintains clear advantages over other programs. These include the program's generous claim preparation times, non-competitive nature and focus on core technologies central to the business. Given the rapidly evolving and heavily regulated nature of the sector, food and beverage processing offers a multitude of opportunities for scientific or technological advancements, investigations and technological uncertainty that are key criteria for SR&ED eligibility. It is highly likely, therefore that this program will continue to play a key role in investments into the sector.
BDO's Advisory Services Team is available to assist with activity scoping to determine eligibility, claim technical and financial preparation, audit support and internal infrastructure support and controls. As well, we can provide a strategic approach as to how SR&ED benefits fit into your company's financial and tax planning in combination with other available grant or incentive program funding.