THIS CASE STUDY EXEMPLIFIES THE APPLICATION OF ESSENTIAL LEGISLATIVE REQUIREMENTS FOR ELIGIBLE SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE THEME PARK INDUSTRY.
BUSINESS SCENARIO
Waveland is a popular water park that offers riveting visitor experiences tailored for domestic and international guests. Waveland is constantly adding new and exciting activities for its customers, therefore engaging in frequent SR&ED work.
In 2016, Waveland engaged in an SR&ED project with the main business objective being to develop an innovative technique to enable the effective and efficient preparation, installation and operation of the TwistTunnel water slide.
After establishing that the design and implementation of the TwistTunnel was innovative due to the unique design of the water slide, Waveland identified the specific activities that would qualify for the Scientific Research and Experimental Development Tax Incentive. To be eligible, Waveland had to make sure 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). Waveland registered the following experimental activities.
WAVELAND’S ELIGIBLE SR&ED ACTIVITIES
Design and development of a series of prototypes to achieve the technical objectives (design of the TwistTunnel installation method).
Waveland’s hypothesis for this SR&ED activity stated,
“It is feasible to design and develop an innovative technique to enable the effective and efficient preparation, installation and operation of the TwistTunnel water slide.”
Throughout this stage, Waveland designed and developed the foundation and infrastructure of the TwistTunnel implementation, the TwistTunnel tube, trapdoor and maintenance entry points. Waveland also prepared the installation site and equipment required for the procedure.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (testing of the TwistTunnel installation method).
The hypothesis for this SR&ED experiment was that the theoretical conclusions from the design phase could be realized through comprehensive analysis and valid testing.
Waveland concluded that the results were overall positive and did indeed prove the hypothesis. Waveland confirmed that it would use the new knowledge generated for further research and development work and would apply the concepts of the project to current and future jobs.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the TwistTunnel installation method).
Waveland’s background research included literature search and review, consultation with industry professionals and potential customers, and preliminary equipment and resources review.
These specific research activities assisted in determining the fundamental elements of the research project, thus qualifying as SR&ED work.
Ongoing analysis of customer or user feedback to improve the prototype design (feedback SR&ED of the TwistTunnel installation method).
Waveland conducted the following qualifying research:
- 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 SR&ED experiments were considered “qualifying 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 WAVELAND KEEP?
Similar to any tax credit or deduction, Waveland had to save documents that outlined what it did in its SR&ED activities, including experimental activities and business records to prove that the work took place in a systematic manner. Waveland saved the following documentation:
- 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
By having these records on file, Waveland 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 activity, thereby proving its SR&ED eligibility.
