THIS CASE STUDY SHOWS THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR QUALIFYING SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES SUPPORTING ENVIRONMENTAL STARTUP PROJECTS.
BUSINESS SCENARIO
Enviro Tech Startup was founded in 2016 to solve complex issues in the water industry, such as developing treatment projects for water and natural gas. Composed of environmental and energy industry professionals, Enviro Tech Startup commits to building and delivering the best-fit, high quality, and most cost-effective treatment programs.
During the development of its treatment programs, Enviro Tech Startup incurred qualified research expenses (QREs) but, having never claimed the SR&ED tax incentive before, the company did not know these activities were eligible. From meeting with an R&D tax specialist, Enviro Tech Startup learned these expenses could be claimed as part of the credit.
ENVIRO TECH STARTUP ELIGIBLE SR&ED ACTIVITIES
With the assistance of an SR&ED Tax specialist, Enviro Tech Startup was able to identify its qualifying SR&ED activities. These QREs included:
- Developing and designing a more efficient and cost-effective process to remove impurities from natural gas
- Improvement of past treatment programs by increasing the use of automation and thereby eliminating the possibility of human error
- Conducting ongoing experiments to constantly improve existing treatment designs and eliminate technical uncertainty
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 ENVIRO TECH STARTUP KEEP?
Similar to any tax credit or deduction, Enviro Tech Startup had to save business records 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.
These were the documents the company was able to save:
- Background research
- Project Records
- Design documents for system architecture and source code
- Conceptual sketches
- Design drawings
- Photographs
- Screenshots
- Testing protocols
- Results from trial runs
- Development plans
- Records of resource allocation
By having these records on file, Enviro Tech Startup confirmed that it was “compliance ready” — meaning if it was audited by the CRA, it could present documentation to show the progression of its SR&ED work.
