THIS CASE STUDY EXEMPLIFIES THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR ELIGIBLE SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN A ZOO OR WILDLIFE INDUSTRY.
BUSINESS SCENARIO
Jungle Junction is a popular, high-quality zoo that offers the viewing of and interaction with animals that are native to the jungle.
In 2008, Jungle Junction noticed an increase in the number of deaths in its gorilla population. After further research, Jungle Junction discovered that the majority of deaths were caused by infectious diseases.
After establishing that infectious diseases were a major cause of mortality in captive gorillas, Jungle Junction began an SR&ED project aimed at controlling and preventing the situation. The company’s main business objective was to create a medical device that could detect disease in gorillas in its early stages which would lead to improvements in diagnosis and management of disease in gorilla populations.
To achieve its technical objectives and overcome the related technical risks, Jungle Junction generated new knowledge at the conclusion of each experimental stage and built upon this knowledge at every stage of the project. To qualify for the Scientific Research and Experimental Development Tax Incentive Program, Jungle Junction had to make sure its activities met the definition of SR&ED in subsection 248(1) of the Income Tax Act (see Commentary below). After self-assessing, Jungle Junction declared the following experiments as SR&ED work.
JUNGLE JUNCTION’S ELIGIBLE SR&ED ACTIVITIES
Design and development of a series of prototypes to achieve the technical objectives and prove the hypothesis (design and adaptation of the disease detection device).
Jungle Junction’s hypothesis for its experiment stated that a disease detection device for gorillas could be designed and developed.
After two years of design and experimentation, Jungle Junction concluded that its experiments showed that such designs were feasible but needed to be fully tested to prove the hypothesis.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard (development and testing of the disease detection device).
The hypothesis for this SR&ED activity stated that with improved knowledge of the specific infectious diseases and their carriers, it was possible to identify mechanisms for improving disease detection in gorilla populations.
Details of this experiment included development of the device based on information gained through the model and testing of the device to ensure efficiency, accuracy and safety.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the design of the disease detection device).
Jungle Junction engaged in background research that included the following activities:
- Literature search and review
- 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
The activities conducted in the background research were necessary because they assisted in identifying the key 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 disease detection device).
Jungle Junction’s eligible SR&ED activities during 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 qualified as SR&ED work 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 JUNGLE JUNCTION KEEP?
Similar to any tax credit or deduction, Jungle Junction 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.
Jungle Junction saved the following documentation:
- Literature review
- Background research
- Project records and laboratory notebooks
- Testing protocols
- Results or analysis from testing / trial runs
- Progress reports and meeting minutes
- Records of resource allocation / usage logs
- Staff time sheets
By having these records on file, Jungle Junction 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, ultimately proving its SR&ED eligibility.
