This case study exemplifies the application of key legislative requirements for eligible SR&ED activities as they apply to relevant activities in the agriculture industry.
Business Scenario
AgriFarm provides affordable chemicals and other crop-protection methods to farmers within Canada. To continue providing its customers with low-cost farming solutions, AgriFarm regularly engages in scientific research and experimental development activities.
While reviewing previous work, AgriFarm noted that liquid formulations of buster, a herbicide used to control grasses, broad-leaved weeds and clovers, were less effective than granulated forms. If liquid buster was sprayed onto the crops, it quickly became a layer of residue on the top of the plant and did not reach the soil. This made it ultimately unsuccessful in its duty as a herbicide. In contrast, dry granular formulations of buster fell off the plant and soaked into the soil.
This caused AgriFarm to launch a new SR&ED project with the following hypothesis:
“To formulate, develop and test a unique spreadable herbicide, buster, that is effectively carried by an organic fertilizer.”
AgriFarm’s main business objective was to enhance the current use of liquid buster in various applications.
First and foremost, AgriFarm needed to determine the eligibility of its proposed SR&ED activities in order to know if it qualified for the Scientific Research and Experimental Development Tax Incentive Program. To be eligible, AgriFarm’s work had to meet the definition of SR&ED in subsection 248(1) of the Income Tax Act (see Commentary below). After self-assessing, AgriFarm decided to register four SR&ED activities.
AgriFarm’s Eligible SR&ED Activities
Formulation and development of a series of prototypes to achieve the technical objectives (formulation of the buster-carrying compound).AgriFarm conducted experiments to prove that it was feasible to create a buster-carrying compound that maximized efficiency.
AgriFarm was successful in formulating four types of buster-carrying compounds, therefore meeting the SR&ED activity requirement of creating new knowledge or products.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (testing of the buster-carrying compounds).The hypothesis for this activity was that the formulations could undergo testing to determine the formula and criterion that produces an optimal end product.
AgriFarm performed testing on the effectiveness of buster-treated crystals and granules for the control of grasses, broad-leaved weeds and clovers (compared to liquid-applied buster formula), therefore meeting the SR&ED requirement of testing a new or improved product, device, process or service.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the buster-carrying compound).The background research for AgriFarm’s project included literature search and review, consultation with industry professionals and potential customers, and preliminary equipment and resources review.
These research activities qualified as SR&ED because they assisted in determining the fundamental elements of the research project.
Ongoing analysis of customer or user feedback to improve the prototype formulation (feedback SR&ED of the buster-carrying compound).AgriFarm conducted activities such as analysis and testing and ongoing development and modification of the compound.These activities were directly related to AgriFarm’s activities because the feedback was imperative to evaluate the performance capabilities of the new formulation in the field and to improve any flaws in the formulation.
The results and outcome of AgriFarm’s experimentation and testing were overall positive, and the findings were consistent with previous work in the industry. AgriFarm also proved the project hypothesis (that it could formulate, develop and test a unique spreadable herbicide [buster] that is effectively carried by an organic fertilizer). The new knowledge generated was used for further research and development work.
Commentary
To qualify, the work must meet the following definition of “scientific research and experimental development” (SR&ED), as defined in subsection 248(1) of the Income Tax Act.
“Scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:
(a) basic research, namely work undertaken for the advancement of scientific knowledge without a specific practical application in view;
(b) applied research, namely work undertaken for the advancement of scientific knowledge with a specific practical application in view; or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto;
and, in applying this definition in respect of a taxpayer, includes:
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer.
What records and specific documentation did AgriFarm keep?
To meet the SR&ED Tax Incentive requirements, AgriFarm had to save documents that outlined what it did in its SR&ED activities, including experimental activities and documents to prove that the work took place in a systematic manner. AgriFarm saved the following documentation:
- Project records/ lab notes
- Conceptual sketches
- Design drawings
- Photographs/ videos of various stages of build/ assembly/ testing
- Prototypes
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
- Patent application number
By having these records on file, AgriFarm confirmed that it was ‘compliance ready’ — meaning if it was selected for an audit by the CRA, it could present documentation that illustrated the progression of its SR&ED activity, thereby proving its SR&ED eligibility.
