Scientific Research and Experimental Development...

Scientific Research and Experimental Development (SR&ED) Tax Credits

Industrial R&D For Innovative Companies

Josh Dyment, P.Eng, MASc, Manager

September 28, 2016

© 2016 Grant Thornton International Ltd. All rights reserved.

What is SR&ED?


The SR&ED Program - Overview

• Canada's largest single source of federal government support for industrial R&D in Canada

• $3.5 Billion in tax credits, annually (average claim size ~$150K)

• 21,000 taxpayers annually

• Up to 18 months to file after year end

• Up to 44% of SRED expenses refunded for CCPC's in Ontario


SR&ED – the New IDEAS Fund

CRA definition of SR&ED: • "A systematic investigation or search that is carried out in a

field of science or technology by means of experiment or analysis " that is:

• Basic Research • Applied Research • Experimental Development

– Includes Support Activities

SR (~10-20%)

ED (~80-90%)


SR&ED – the New IDEAS Fund

My Definition: • Systematic investigation of new ideas in an attempt to

develop or improve technology or processes through experimentation or analysis, which results in technological advancement

Ideas that are not routine or straightforward for someone in your industry

Ideas do not have to succeed – failure is ok as long as you learn something from trying

Advancement must be in a field of science or technology, rather than a technical or commercial advancement

Make hypothesis Test hypothesis Form conclusion


Drivers for SR&ED? Ask yourself…

Are you...

• Developing something new or making incremental improvements to it (i.e. materials, devices, products, or processes)?

• Improving functionality, quality, cost, cycle times, scrap rates, life cycles, etc. of something?

• Better at something today than you were in the past?

The something may be the focus of your SR&ED Project!


Examples of SR&ED

• Materials, e.g. improved pipe materials

• Devices, e.g. pumps, engines, medical implants, braces

• Products, e.g. solar cells, drones, games, apps

• Processes, e.g. reduced emissions, recycling development


What is NOT SR&ED

• Market Research or Sales Promotion;

• Quality Control or Routine Testing;

• Commercial Production;

• Using of New Technology for its Intended Purpose;

• Routine Style Changes;

• Routine Data Collection;

• Research in Social Sciences or Humanities;

• Prospecting, Exploring, Drilling for or Producing Minerals, Petroleum or Natural Gas (Geological Risk);


SR&ED Eligibility: Five Questions

• These questions form a test for eligibility:

1. Is there Scientific or Technological Uncertainty (STU)?

2. Was there a hypothesis aimed at reducing STU?

3. Was the work consistent with the scientific method?

4. Was there Scientific or Technological Advancement (STA)?

5. Were detailed records kept?


Question 1: Is There an STU?



• Definition of Scientific / Technological Uncertainty:

– It is not known how a result or objective can be achieved on the basis of generally available scientific or technological knowledge or experience

– Objective is to develop something or overcome something to gain knowledge / advancement

??



• Examples of STUs:

– Uncertain of the design approach to overcome limitations / constraints **Most Common**

– Ex: Injection molding of high viscosity material – Ex: Automated cleaning of clear stones – Ex: Reduce load times

– Uncertain if fundamental scientific theory is correct and need to perform experimentation / analysis to determine

– Ex: New drug therapy for cancer treatment


Question 1: Is There an STU? (Technical Problem vs. Technological Problem)

← Technical Problem (no SR&ED)

← Technological Problem (SR&ED)



• Things to consider:

– If a competitor has already solved this problem but is unwilling to share the details

– If the knowledge / solution can be gained / achieved but it is prohibitively expensive

– Unsure if product will be a commercial success

– You know how to solve the problem but it is very difficult to do and will take a team of engineers several months to develop the solution

– valid STU

– valid STU

– invalid STU. Goal must be to achieve technological advancement

– invalid STU. No uncertainty. You know how to solve the problem. The level of difficulty to solve it is irrelevant.


Question 2: Was there a hypothesis aimed at reducing STU?


Question 2: Was there a hypothesis aimed at reducing STU?

Base Level

Target Level

Barriers, Constraints, Uncertainties, Challenges

Standard practice

Ideas attempted to overcome barriers

SR&ED Process:


Question 3: Was the work consistent with the scientific method?

Not SR&ED



Identify Scientific / Technological Uncertainty

Idea to Resolve Uncertainty

Experimentation / Analysis, Make Conclusions

Summarize Advancements

VS.

SR&ED Process (Systematic) Random / Trial and Error


Question 3: Was the work consistent with the scientific method? – Support Work • Support Work: Work that is commensurate with the needs,

and directly in support of resolving scientific / technological uncertainties

• Examples of Support Work:

– Building an airplane to test a new wing design

– Software simulators

– Custom test equipment



• Things to consider:

– Optimization (tweaking to find the sweet spot within a known range)

– Testing an idea on an assembly line while running commercial production

– Troubleshooting

– Not typically eligible. Work must be done to understand scientific principals or evaluate a design methodology

– Eligible. However can only claim costs that are incremental to regular production costs

– May be eligible if it is in support of the experimentation / analysis


Question 4: Was there Scientific or Technological Advancement (STA)?


Question 4: Was there Scientific or Technological Advancement (STA)? • Definition of Scientific / Technological Advancement:

– Moves the scientific or technological knowledge base of a company to a higher level through an increase in the understanding of technology


Question 4: Was there Scientific or Technological Advancement (STA)? • Examples that are STAs:

– Development of a new kind of sensor technology that can measure 5x more accurately than others

– Understanding of the relationship between number of lifting rotors (1 vs 2 vs 8), number of rotor blades (3 vs 4 vs 5) and gearbox ratio on fuel efficiency for large drones

– Development of new communications architecture that reduced time lag by 10 seconds


Question 4: Was there Scientific or Technological Advancement (STA)? • Examples that are NOT STAs:

– Making a structure twice as thick

– Reducing dwell times in a multi-step automation process

– Integrating an existing technology for its intended purpose

– Changing the color by changing the resin concentration

– Adding a software layer to make a driver more user-friendly


Scientific / Technological Advancement

• Things to consider – All ideas attempted were unsuccessful. We could not reach

our goal and abandoned the project.

– We added wifi, bluetooth and increased the screen resolution of our product. We can now increase our price and be more profitable.

– We trialed 5 industrial adhesives and found that number 4 performs best with our materials.

– valid STA. You learned ideas that do not work. This will aid you when working on other similar projects

– invalid STA. There is no technological advancement

– invalid STA. You did not develop or learn anything new about science or technology. You used existing technology for its intended purpose.


Question 5: Were detailed records kept?


Question 5: Were detailed records kept?

• Primary intent: Prove that the work was actually performed and costs were incurred in the claim period

• Secondary intent: Advancements are kept for future use


SR&ED Project within Commercial Project

Some activities will fall outside of the scope of the SR&ED Program.

STA STU

STA

STU STA

STU

STA STU

Core SR&ED Work

Support Work

The Commercial Project

The SR&ED Project


SR&ED-Industrial/Manufacturing Example

• Pump Leak Example


Two SR&ED Exercises (see handout) – 15 minutes

• Assess the SR&ED eligibility of both projects

• For each, determine the following:

– What were the technological uncertainties (TUs)?

– What hypotheses / new ideas were aimed at overcoming the TUs?

– How did they test the hypotheses / ideas? (Was it systematic or random?)

– What was the technological advancement that was achieved (TA)?


Example 1 – Potato Peeler

The basic design of the potato peeler has not changed for more than 100 years. Acme Kitchen Company (AKC) wanted to develop a novel peeler by adding a phosphorescent substance to the plastic handle so it would be easier to find the peeler in a dark kitchen drawer.

AKC got several samples of phosphorous powders from various suppliers. AKC then carried out a number of production runs, testing each powder at varying levels in the molding process. Adding the phosphorescent substance did not require any change to the molding process or the type of plastic, nor did it affect the other physical properties of the handle or how the peeler worked.

As a result of the work performed, AKC determined, for each powder, the amount needed to produce the proper glow in the handle. AKC then chose a supplier based on an analysis of the amount of powder needed and the unit cost of the powder.


Example 1 – Potato Peeler

• What were the technological uncertainties (TUs)? – No Technological Uncertainty. They knew how to add the

phosphorescent substance and adding it did not affect the properties of the handle or the performance of the peeler.

• What hypotheses / new ideas were aimed at overcoming the TUs? – Adding a small concentration of phosphorescent material to the mix

would enable it to glow in the dark. This is not really a new idea, and is standard practice for someone familiar with injection molding.

• How did they test the hypotheses / ideas? (Was it systematic or random?) – Systematically tried different concentrations to note the effects.

• What was the technological advancement that was achieved (TA)? – No Technological Advancement was achieved. They utilized their

existing knowledge base to arrive at the solution. They did not develop any new techniques or design methodologies.


Example 2 – Coffee Cup

Acme Paper Products (APP) is a manufacturer of custom paper products for the food and beverage industry. A new tilt seal test requirement was released by APPs customer which specified that no liquid could leak from their coffee cup when held at a 45 degree angle. APP confirmed that its existing cup designs could not pass this test and a redesign was required. APP also decided to integrate 20% recycled content into the cup stock as a cost saving measure at the same time. APP redesigned the cup shape, lid shape and production tooling as per its standard practices but found that the formed cup and rim did not create a tight enough seal - 75% of the manufactured parts had excessive leakage. APP experimented with adjusting routine production parameters to adjust the cup height, cup OD and cutting die alignment however these changes had little effect. Further investigation revealed that this composite material experienced uneven shrinkage after cooling, resulting in excessive OD variation. APP thought to try to pack more material into the cup rim to increase its density and experimentation with this idea showed marginal improvements to the OD variation however the majority of the cups still failed. APP then experimented with different rim shapes and after several iterations were able to develop a new Bezier curve shape with a high density that resulted in a 100% pass rate. However, these changes resulted in localized buckling near the top of the cup. To address this APP performed further experiments to understand how the clamp locations, initial blank size and folding wing designs affected the stiffness and developed guidelines for this material that eliminated buckling.



• What were the technological uncertainties (TUs)? – Uncertain of the design approach for to pass the new tilt seal test using

new material with 20% recycled content – Uncertain of the relationship between cup stock and machine

properties to reduce buckling

• What hypotheses / ideas were aimed at overcoming the TUs? – Packing more material into the lip will increase density to reduce OD

variation – Different lip designs would result in less OD variation



• How did they test the hypotheses / ideas? (Was it systematic or random?) – Made adjustments to the tooling, ran product, measured results

• What was the technological advancement that was achieved (TA)? – Development of new lip design – Understanding of relationship between clamp locations, initial blank

size and folding wing design reduce stiffness to reduce buckling


Financial Aspects of SR&ED Claims


SR&ED Expenditures Pool

Salaries / Wages of Employees

Contractors performing SR&ED on your behalf Materials consumed

or transformed


Salaries / Wages

• Employees directly engaged in SR&ED activities in Canada

• Only hours spent on overcoming TU's or eligible supporting work may be considered

• Up to 10% of total labour cost can be performed outside of Canada

• Using Proxy Method, 55% is added to all hours


• Contractors must be taxable Canadian suppliers

• Expenditures to contractors to perform directly related SR&ED activities on behalf of the claimant

• The SR&ED must be carried out in Canada

• Value is reduced by 20%

• Cannot include routine work tasks such as: – Machining time – Wiring – Assembly

Contractors


Material Costs

• All of the raw materials or other items that compose the body of a thing at a given moment in the SR&ED process

• Has been or likely will be destroyed or rendered virtually valueless as a result of the SR&ED (<10% of original value)

• Cannot claim materials that will be used for commercial production

• Examples:

– Ex: Prototype that failed / was damaged during testing – Ex: PCB's that do no work, cannot be reused


How Much Credit are you Eligible for?

CCPC Other OITC 10% 10%1

ORDTC 4.5% 4.5% Federal ITC 35%2 15%

Actual Rate 43.5%3 26.2%3

• Credits are based upon expenditure pool

1) May not apply if total taxable income or taxable capital of worldwide associated entities exceeds thresholds

2) Enhanced rate only applies on first $3 million expenditures, and if prior years taxable income <$500,000 and prior years taxable capital <$10 million

3) These are maximum rates. A portion of these may be non-refundable.


• Directly engaged T4 wages: $100K • Contractors: $25K • Materials Consumed: $10K • Proxy Method

Example – Calculating SR&ED Credit

T4 wages: $100,000 Proxy overhead: $55,000 Contracts: $25,000 x 0.8 = $20,000 Materials Consumed: $10,000 Total Expenditures: $185,000 SR&ED Refund (@43.5%): $80,475


SR&ED Services – How we can help

• Identify eligible work and costs

• Client training on SR&ED process

• Prepare SR&ED claim - T661 and technical project descriptions

• Submit claims with tax returns (T2 and Provincial)

• Act as liaison with CRA Officials

• Act as client advocate during CRA audits and objections


• Contemporaneous Documentation (CD) is a requirement of the SR&ED program – not an option!

• CD requires effort from your technical staff to undertake – define SR&ED Champion

• Use existing business documentation and augment for SR&ED purposes

• Small insurance for successful claims

Remember...


Thank you! You can learn more at: GrantThornton.ca

Date post:	06-Mar-2018
Category:	Documents
Upload:	hoangnguyet
View:	218 times
Download:	5 times

Scientific Research and Experimental Development...

Documents