THIS CASE STUDY SHOWS THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR QUALIFYING SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE SOFTWARE INDUSTRY.
BUSINESS SCENARIO
IVO Tech (IVO) is a leading software company specializing in employment screening software. The company was founded to provide new and innovative technologies to employment screening firms to help them improve productivity, reduce overhead, and have technological competitive advantages over otherwise similar firms.
IVO incurred qualified research expenses relating to the development of numerous innovative features in 2015-2017. IVO had never claimed the SR&ED tax incentive before and was unaware it was performing qualified activities. After meeting with a specialist and learning more about SR&ED, IVO realized it was eligible for the credit.
IVO TECH’S ELIGIBLE SR&ED ACTIVITIES
The SR&ED tax incentive specialist helped IVO determine its qualifying SR&ED activities, many of which were part of the company’s daily operations. IVO’s qualified research expenses (QRE) included:
- Development of new or improved software features to meet changing consumer preferences;
- Improvement to processing speeds
- Improvements for storage
- Testing across all supported releases to determine exposure
- Experimentation with possible fixes until an adequate solution was determined
- Creating and executing test cases to eliminate uncertainty prior to releasing software to customers
After adding up labor and supplies costs from 2015-2017, IVO claimed the federal SR&ED Tax Incentive and received a tax credit. After realizing the benefits, a sustainable methodology was also established to help IVO 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 IVO TECH KEEP?
Similar to any tax credit or deduction, IVO 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. IVO saved the following documentation as evidence:
- Innovation Log
- Records of changes and bug fixes
- Photographs/ videos of testing
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
- Receipts
- Labor time sheets
By having these records on file, IVO 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.
