THIS CASE STUDY SHOWS THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR QUALIFYING SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE AVIATION INDUSTRY.
Airtime Helicopters (Airtime) was established in 2008 to provide charter, scenic and photography services.
Airtime felt a need to further enhance the recording quality and stability of its current camera unit to improve clarity and visibility during vertical monochromatic imaging, mapping and surveying. In 2009, Airtime began an SR&ED project dedicated to developing and designing an attachment camera which would provide helicopter camera crews with unprecedented levels of equipment reliability for use in mapping and imaging applications.
Airtime engaged in a program of systematic, investigative and experimental activities to overcome the significant technical uncertainty and develop new knowledge regarding the impact of specific variables on the effectiveness of the new attachment design.
After experimentation, Airtime needed to determine the eligibility of its proposed SR&ED activities in order to know if they qualified for the Research and Experimentation Tax Incentive Program. To be eligible, Airtime had to be certain that its “qualified research” met the definition of scientific research and experimental development in subsection 248(1) of the Income Tax Act (see Commentary below).
AIRTIME’S ELIGIBLE SR&ED ACTIVITIES
Design and development of a series of prototypes to achieve the technical objectives and prove the hypothesis (design and development of a camera for mapping and surveying purposes).
Airtime conducted the design and development of spring settings on specific camera types, as well as design consideration on the impact of different wind conditions. Airtime believed its camera solution could be achieved by conducting the following activities to reduce the unit’s vibration:
- A series of information was gathered and evaluated to identify knowledge gaps and achieve the technical objectives.
- A series of design experiments were undertaken to prove the hypothesis.
- A series of trial data was analyzed and evaluated to achieve satisfactory reproducible results.
- A series of developments and modifications were undertaken to interpret the algorithm data and draw conclusions that served as a starting point for the new design hypothesis.
Background research to evaluate current knowledge gaps and determine feasibility (background research for mapping and surveying camera unit).
The following background research was conducted by Airtime:
- Literature search and review
- Consultation with industry professionals and potential clients to determine the level of interest and commercial feasibility of such a project
- Preliminary equipment and resources review with respect to capacity, performance and suitability for the project
Airtime’s background research qualified as SR&ED because it assisted in identifying the key elements of the project.
Ongoing analysis of customer or user feedback to improve the prototype design (feedback SR&ED of the camera and its mapping and surveying abilities).Airtime conducted the following SR&ED activities during this phase of experimentation:
- Ongoing analysis and testing to improve the efficiency of the project
- Commercial analysis and functionality review
These activities qualified as SR&ED because they were necessary to evaluate the performance capabilities of the newly developed design in the field and to improve any imperfections.
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 AIRTIME KEEP?
Similar to any tax credit or deduction, Airtime had to save business records that outlined what it did in its SR&ED work, including experimental activities and documents to prove that the activities took place in a systematic manner.
Airtime only kept records of its literature search findings, leaving vast room for improvement in the area of substantiation.
As a company claiming SR&ED, you always want to be “compliance ready” — meaning if you were audited by the CRA, you could present documentation to show the progression of your SR&ED work. Here are some types of documentation that would be beneficial to save in the case of an audit:
- Project records/ lab notes
- Photographs/ videos of various stages of build/ assembly/ testing
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
- Conceptual sketches
- Email correspondence
- Patent application number
- Progress reports and meeting notes