THIS CASE STUDY EXEMPLIFIES THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR ELIGIBLE SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE FILM AND MEDIA INDUSTRY.
BUSINESS SCENARIO
ViewLine Productions (ViewLine) is a Canadian, full-service media company specializing in film production and interactive media integration. As part of the film and media industry, ViewLine Productions is constantly focusing on new product development to remain competitive in the field. It is regularly conducting SR&ED activities to come up with new technologies to produce the highest quality media products.
To keep up with client demand and the competitive nature of the industry, ViewLine Productions began to reinvent their equipment to produce highly innovative products, special effects and alternative delivery channels.
ViewLine Productions had never claimed the SR&ED tax incentive before, and was unaware that it was performing qualified research and development. To be eligible for the credit, ViewLine activities had to meet the definition of “scientific research and experimental development” in subsection 248(1) of the Income Tax Act (see Commentary below). After consulting a specialist, ViewLine realized it was eligible for the SR&ED Tax Incentive.
VIEWLINE’S ELIGIBLE SR&ED ACTIVITIES
The R&D tax specialist helped ViewLine determine its qualifying SR&ED activities, many of which were part of the company’s daily operations. ViewLine’s qualified research expenses (QRE) included:
- Development of new or improved products to meet changing consumer preferences;
- Development of visual effects and animation;
- Development of new media asset management systems;
- New software technologies for computer gaming;
- Improving web-based systems and interactive media.
ViewLine claimed the federal SR&ED tax incentive and a sustainable methodology was also established to help the company identify, document and substantiate eligible SR&ED projects and costs on an ongoing basis.
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 VIEWLINE PRODUCTIONS KEEP?
Similar to any tax credit or deduction, ViewLine Productions 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. ViewLine Productions saved the following documentation as evidence:
- 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 number
By having these records on file, ViewLine confirmed that it was ‘compliance ready’ — meaning if it was audited by the CRA, it could present documentation that illustrated the progression of its SR&ED activity, therefore proving its SR&ED eligibility.
