Is Water a Material for SR&ED?

Water that is used to carry out SR&ED work is generally not considered as a material for SR&ED. Its cost may only be treated as an SR&ED ‘overhead and other expenditures’ under the traditional method i.e. identifying and claiming all overhead and other expenditures directly related to SR&ED that occurred during the year. Despite this, in some instances, the cost of water used in the implementation of SR&ED can be considered as a part of the cost of materials for the SR&ED.

In a majority of industries such as chemical, petrochemical, oil and gas, mineral, pulp and paper and the textile industries, water is typically categorized into:

• Utility water – This is the water that is used throughout the plant.
• Boiler feed water – This is used to generate steam on site.
• Process water – Just like any other input material, this is considered as a material that enters the process and becomes part of the intermediate or the final product.

Here is how each relate to an SR&ED claim:

Utility water is never allowed as a material for the SR&ED Tax Incentive.

Boiler feed water that is used to generate steam for heat or energy is also not allowable as a material for SR&ED. However, where the traditional method is used, the cost of utility water or boiler feed water may be claimable as an SR&ED ‘overhead and other expenditures’.

Process water is usually pre-treated to conform to the specifications for a specific process. Once it enters the process, it is then rendered useless, even if it is later recovered. In the case of SR&ED, the process water stream would meet the interpretation of materials for SR&ED and would be considered as materials consumed during the SR&ED activity. This holds true as long as the water is not used in commercial production.

In order to claim the cost of water as materials for SR&ED, the claimant should clearly identify and document the portion of the water consumed during the undertaking of SR&ED. If you have any further questions about eligible expenditure, please contact Swanson Reed R&D Tax Advisors.