SR&ED (Scientific Research & Experimental Development) is the largest and most important corporate tax incentive program in Canada. SR&ED projects exist in a long list of established industries, including Food & Beverage. In every industry where SR&ED is identified for these generous benefits, the professionals encounter their own unique set of challenges when dealing with CRA and the complexities of this program.
SR&ED is designed as a corporate incentive program, but largely administered as a compliance program. Often times, claimants describe their experience with the program as frustrating, difficult, (or even worse terms) depending on the events that transpire during their audit. Because it’s an incentive program, with a guide that’s relatively easy to follow, many claimants decide to self-prepare and face CRA with no professional guidance whatsoever. Others hire inexperienced freelancers, or even credible accounting firms. That’s when the trouble begins.
Let’s explore the troubles that are particular to the Food & Beverage industry.
CRA distinguishes between so-called SR&ED (a policy term unique to the Canadian Income Tax Act), and the colloquial term R&D (Research & Development). Non-experts might not differentiate between SR&ED and R&D.
The SR&ED program is not designed to reward companies for routine R&D, which may involve development of new and improved food products, and strictly speaking, SR&ED does not reward for innovation either.
Eligible activities might include:
- Design of experiments (which might include development of new formulations),
- Experimentation (which might include routine activities such as baking and mixing),
- Testing (which might include taste testing),
- Analysis (which might include critical thinking on a technical problem)
Activities that are rewarded under the SR&ED program, are either eligible or ineligible, depending upon whether a technological obstacle exists. However, that term is largely misunderstood, not just in the Food & Beverage Industry, but in many industries.
The best way to think about a technological obstacle is the following. A technological obstacle exists when the standard methods known to experts in the field have failed to yield the desired results when they were applied to the technical or scientific problems described in the project. When that happens, the professional decides to define a new hypothesis which involves the design of new experiments. All work must be consistent with the scientific method.
But then your case is screened, and selected for review. You think you’re all good, but CRA assigns a PhD in Chemistry to your case, and apparently nothing you did was eligible.
But, wait, you say. It’s an incentive program. No?
Yes, the incentives kick in if you succeed in convincing CRA that your project is consistent with policy.
So, what happened? You know you experienced challenges when you developed your gluten-free sugar-fee celiac-certified 5-minute ready-bake apple pie with under 200 calories, but CRA says it’s all just mixing and cooking. Where did you go wrong? Why isn’t your project eligible? You think, how could we possibly solve that problem without mixing and baking? Are we supposed to hire NASA scientists in order to solve our apple pie problem?
The key is to frame your project as activities that were necessary because a technological obstacle was encountered when all your due diligence efforts failed. Then, you’ll want to make sure that you are presenting well-organized scientific evidence.
This is the real disconnect between industry and CRA. You operate your business, like a business, and CRA thinks you operate your business like a laboratory.
The question really comes down to, do you want those refunds? Your annual refund could be worth anywhere between $50,000 to $300,000, and even more. If you do want the money, then you need to present your case properly. If not, you’re going to lose.
The total volume of SR&ED approvals has gone down by approximately 20% in the last 5-7 years, since about 2010. CRA has achieved this budgetary advantage mostly through strict interpretations that led to fully denied claims. But you don’t have to be one of the casualties.
If you are interested in obtaining your SR&ED tax credits in the food and beverage industry, either as a first time claimant, or if you want to start claiming again after a break, then consider hiring the award-winning experts at Bond Consulting Group. With our proven methods (SR&ED Proof), we win practically every case that we prepare. We prevail in the toughest of audits, and we even Rescue clients from CRA when their claim was prepared by someone else. When all else fails, we can take your case to Tax Court.
Don’t gamble with your SR&ED claim.