THIS CASE STUDY SHOWS THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR QUALIFYING SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE LOGISTICS INDUSTRY.
BUSINESS SCENARIO
Link Logistics (Link) is a world renowned vehicle-telematics designer and supplier. Link is constantly conducting research and development work to continue providing its clients with innovative solutions.
There are many legislated operational items that transport operators must comply with, including on-board mass limits, driver-fatigue restrictions and speed requirements. The parameters of these items are strictly defined and differ from state to state or zone to zone; therefore, up-to-date on-road compliance must be monitored accurately.
Link’s goal was to deliver a complete compliance solution. Link launched an SR&ED project with the following hypothesis:
“A multi-function, in-vehicle computing platform can be designed and developed to improve the processes that ensure transport operators comply with, and operate within, legislative requirements.”
Link needed to determine the eligibility of its proposed SR&ED activities in order to know if they qualified for the Scientific Research and Experimental Development Tax Incentive Program. Link had to be certain that its “qualified research” met the definition of SR&ED in subsection 248(1) of the Income Tax Act (see Commentary below). After self-assessing, Link decided to register four SR&ED activities.
LINK’S ELIGIBLE SR&ED ACTIVITIES
Design and development of a series of prototypes to achieve the technical objectives (design of the in-vehicle compliance platform).
The hypothesis developed for this activity stated,“It is feasible to design the business logic underlying an in-vehicle platform to improve compliance processes for various transport operators.”
Because the industry of information technology rapidly develops, it was critical for Link to remain knowledgeable in this field through ongoing research.
Link engaged in multiple experiments, mainly consisting of coding, and continued to test the platform designs created in its next R&D phase.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (testing of the in-vehicle compliance platform).
The hypothesis for this activity was that the theoretical conclusions from the design phase could be realized through comprehensive analysis and valid testing.
After much experimentation, Link concluded that the results were overall positive and did indeed prove the hypothesis. Link confirmed that it would use the new knowledge generated for further research and development work, which could lead to iterations of the design.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the in-vehicle compliance platform).
Link conducted the following experiments during its research phase:
- Literature search and review, including maintaining awareness of changing legislation in the different states and zones
- Consultation with industry professionals and potential customers 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
- Consultation with key experts to determine the factors they considered important in the design and to gain an understanding of how the design needed to be structured accordingly
These specific research activities assisted in determining the fundamental elements of the research project, therefore qualifying as SR&ED work.
Ongoing analysis of customer or user feedback to improve the prototype design (feedback SR&ED of the in-vehicle compliance platform).
Link’s eligible SR&ED work for this phase of the project included:
- Ongoing analysis and testing to improve the efficiency and safety of the project.
- Ongoing development and modification to interpret the experimental results and draw conclusions that served as starting points for the development of new hypotheses.
- Commercial analysis and functionality review.
These activities were considered “qualified research,” because they were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design.
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 LINK KEEP?
Similar to any tax credit or deduction, Link 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. Link saved the following documentation:
- Project records/ lab notes
- Conceptual sketches
- Design drawings
- Literature review
- Background research
- Design documents for system architecture and source code
- Testing protocols
- Results of records of analysis from testing/trial runs
- Records of resource allocation/usage logs
- Staff time sheets
- Tax invoices
By having these records on file, Link 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, ultimately proving its SR&ED eligibility.
