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Helping to Navigate Non-Qualified SR&ED Expenditures

Investing in research and development (R&D) leads to long-term growth. However, funding innovation can be difficult, especially for growing companies with limited resources.

The Canadian government recognizes this challenge. It offers the Scientific Research & Experimental Development (SR&ED) Tax Incentive Program to support businesses. This program offsets R&D costs with significant tax credits, encouraging innovation and global competitiveness. To maximize your claim, you need to identify non-qualified SR&ED program expenditures, especially in marketing and sales. 

While innovation might involve some marketing and sales elements, there’s still a clear distinction between these activities and what qualifies for SR&ED tax credits.  

These expenses relate to activities that don’t align with SR&ED’s focus on pushing technological boundaries. They don’t involve the systematic investigation needed to overcome a technological challenge through scientific or engineering methods. Including these expenses in your claim can lead to problems with the CRA.

SR&ED Eligibility Criteria

Your project must meet these fundamental requirements to qualify for SR&ED:
  • Your goal must be to create a new material, device, product, or process, or to improve an existing one.
  • There must be a lack of readily available knowledge or solutions that prevent you from achieving your objective.
  • Your work must follow a scientific method. This means you form a hypothesis, conduct experiments, analyze results, and document your progress.
Now that we’ve established the criteria for qualifying work, let’s explore common pitfalls to avoid when navigating non-qualified SR&ED expenditures, particularly in marketing and sales. 

Common SR&ED Pitfalls in Marketing & Sales

Marketing and sales activities often overlap with eligible SR&ED work, leading to confusion about eligible expenses. This can result in claim inaccuracies and possible rejections. Let’s break down what doesn’t qualify as eligible SR&ED work.

Non-Qualified SR&ED Expenditures Related to Marketing

The focus of SR&ED is on technological advancement, not market analysis or product promotion. Market research, customer surveys, advertising campaigns, trade show participation, and standard website development usually fall outside the SR&ED scope.

Non-Qualified SR&ED Expenditures Related to Sales

SR&ED doesn’t cover activities focused on customer relationships or demonstrating established products. Salesforce training, routine product demonstrations, and direct customer support for standard issues usually don’t involve the technological experimentation required by the program.

Your SR&ED claim must clearly distinguish between eligible R&D and routine marketing and sales tasks. Avoid using language that blends research objectives with promotional or sales goals. 

Routine Quality Control & Testing

Activities centered on meeting existing standards typically don’t qualify for SR&ED. This includes standard quality checks, testing for compliance, and troubleshooting that doesn’t involve experimentation or overcoming technological obstacles.

Production-Related Activities

Once a product or process reaches full-scale commercial production, costs usually no longer qualify for SR&ED. This includes optimizing processes solely for efficiency gains. For example, increasing production output without addressing technological challenges wouldn’t qualify.

Social Sciences Research

SR&ED focuses on hard sciences and engineering. Research centered on psychology, sociology, or economics often lacks the technological or scientific basis needed for the program.

Style Changes and Enhancements

Changes that affect the look and feel of a product or process usually don’t involve the scientific experimentation or technological breakthroughs required by SR&ED.

When Routine Work Becomes SR&ED Eligible

While the SR&ED program has clear distinctions between eligible and ineligible activities, there are certain scenarios where excluded work can become eligible.

Exceptions for Marketing & Sales-Related SR&ED

Highly technical software development for marketing or sales might qualify. This includes developing unique analytics platforms or custom sales tools that address complex technological challenges. These activities involve overcoming technical unknowns and require experimentation, making them possible candidates for SR&ED.

Grey Areas in Routine Activities

Even standard activities can reveal unexpected SR&ED potential. For example, troubleshooting a production issue might uncover a deeper technological problem, requiring extensive investigation to find the cause and develop a solution. Or, quality control testing might lead to new testing methods if current ones aren’t sufficient. 

These scenarios involve addressing technological questions and taking a systematic approach, potentially qualifying for SR&ED.

These exceptions highlight the importance of good record-keeping and knowing the details of SR&ED eligibility. When routine tasks unexpectedly demand solving technological problems through experimentation, document them to potentially include them in an SR&ED claim.

Don’t Risk SR&ED Rejection

Identifying non-qualified SR&ED expenditures can help maximize your claim’s potential. Meanwhile, mistaking ineligible activities for qualifying work can lead to reduced credits or claim rejections. By defining the SR&ED program’s requirements, you can focus your efforts on eligible R&D.

If you have doubts about whether specific activities qualify for SR&ED support, get help from professional SR&ED consultants.  

The Importance of Documentation in Quality-Related SR&ED

You need documentation in quality control, especially if you’re considering SR&ED eligibility. Even routine activities can reveal SR&ED potential, but only if you have strong records. 

Capture any unexpected problems that arise during quality checks, even if you find a quick solution. Document all experimentation and how you solved the issue. Record-keeping shows you went beyond standard knowledge to address a technological challenge.

The CRA wants to see records created as the work happens. Detailed, real-time documentation proves you used a systematic approach when standard procedures failed. This type of investigation aligns with SR&ED requirements.

Get the Support You Need for SR&ED Quality Control

Identifying non-qualified SR&ED expenditures within quality control and testing can be tricky. Routine checks focused on maintaining existing standards usually don’t qualify. SR&ED potential arises when you face unexpected quality issues. This requires investigation and experimentation to find solutions.

Additionally, SR&ED potential exists when you want to improve testing methods or achieve results beyond current limits.

Understanding these distinctions and preparing successful SR&ED claims demands specialized knowledge. Don’t leave potential credits on the table. G6 Consulting can help you identify SR&ED-eligible work within your quality control processes. 

We make sure you have the required documentation and maximize the value of your SR&ED claim. Find out how we can optimize your SR&ED returns for quality-related innovation.