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Navigating Non-Qualified SR&ED Expenditures: A Guide

SR&ED (Scientific Research and Experimental Development) is a Canadian government program designed to encourage innovation and technological advancement.  However, not all expenditures qualify for SR&ED credits. Let’s explore the concept of non-qualified SR&ED expenditures and their implications for social research. 

The Scientific Research and Experimental Development (SR&ED) program is a Canadian government initiative designed to fuel innovation. Companies conducting research and development (R&D) that results in technological or scientific advancements may be eligible for tax credits or refunds.

SR&ED recognizes four categories of eligible work:

  • Basic Research: Expands scientific knowledge without immediate commercial goals. For example, a biochemist investigates fundamental cellular processes to gain insights relevant to disease treatment, without a specific drug in mind.
  • Applied Research: Also advances scientific knowledge but targets a practical problem. For instance, a software company researches new encryption algorithms to enhance existing cybersecurity products.
  • Experimental Development: Focuses on overcoming technological or scientific hurdles to create new or improved materials, devices, products, or processes. Here’s an example: An automotive manufacturer develops a prototype for a more fuel-efficient engine, requiring extensive testing and refinement.
  • Support Work: Activities that directly support and align with the needs of basic research, applied research, or experimental development. For example, a technician conducts data collection and analysis specifically for the fuel-efficient engine project. 

What Makes Work SR&ED-Eligible?

Businesses determine SR&ED eligibility by considering the “why” and “how” of their work. The “why” focuses on advancing scientific or technological knowledge and resolving uncertainties. This requires generating new knowledge or understanding.

The “how” involves a systematic approach to problem-solving. This includes experimentation, testing, or iterative analysis. Companies use established practices, methodologies, and techniques. They collect and document data throughout the process.

SR&ED work addresses gaps in current knowledge. Uncertainties arise from limitations in technology, unpredictable behaviour, or the need to improve performance.

How SR&ED Helps Businesses Resolve Technological Uncertainties

Consider a company developing a new lightweight alloy for the aerospace sector. They likely face uncertainty about their ability to withstand extreme conditions. SR&ED-eligible work involves systematic testing and analysis to predict and improve performance. 

Similarly, a software firm developing a more efficient algorithm for data compression might face uncertainty about the ideal balance between speed and accuracy. SR&ED work could involve prototyping and testing different algorithms to find the optimal solution. 

The SR&ED program has specific categories of work that it does not support. Businesses need to be aware of common exclusions to avoid claim rejections. Here are some of them:

Market Research or Sales Promotion

The program does not support activities focused on customer preferences, market trends, or advertising effectiveness. These activities aim to understand existing market dynamics, not advance scientific or technological knowledge.

Quality Control or Routine Testing

SR&ED does not cover ensuring products meet standards or conducting repetitive tests without experimentation. These activities focus on maintaining established performance levels, not resolving technological uncertainties.

Social Science or Humanities Research

SR&ED generally excludes projects focused on areas like sociology, psychology (with exceptions noted later), history, or the arts. The program prioritizes advancements in science and technology. However, there are specific circumstances where social research can become relevant to SR&ED. 

Social Research and SR&ED

Social research alone doesn’t qualify for SR&ED credits. However, it can still support projects that focus on scientific or technological advancement. That’s why you need to distinguish between direct and indirect contributions. Social research won’t meet SR&ED requirements on its own, but it can offer insights that enhance eligible technological development.

For instance, designing user-friendly interfaces often relies on insights from psychology about perception, decision-making, and behaviour. This type of psychological work is SR&ED-eligible if it significantly influences the technology’s design.

Additionally, developing medical devices intended for patient use might involve psychological studies on adherence and usability. If this research directly affects the device’s design or functionality, it qualifies for SR&ED support.

Grey Areas in Non-Qualified SR&ED Expenditures

SR&ED interpretation can be complex, particularly in projects with interdisciplinary elements. The distinction between qualifying and non-qualifying work might not always be clear-cut.

Even if social research activities are initially conducted for non-SR&ED purposes, careful documentation is essential.  These records might later prove valuable in demonstrating the indirect support they provided to an eligible technological development project. 

SR&ED Questions? Get Answers from G6 Consulting

Core social research projects usually fall outside its scope, but they can offer indirect support to eligible technological work. Be aware of other common exclusions, like routine quality control, market analysis, or production scaling.

At G6 Consulting we go beyond identifying non-qualified SR&ED expenditures. We help clients assess their projects and maximize their benefits.

Businesses using social research should carefully consider how it might support technological advancement. Lastly, remember that documentation and guidance can help you leverage eligible indirect contributions.

Frequently Asked Questions

What are the main categories of work that SR&ED excludes?

  • Market research and sales promotion
  • Routine quality control or testing
  • Social science or humanities research (with important exceptions)

Can social research ever be part of an SR&ED claim?

Yes, but only when it directly supports and is essential to a project focused on scientific or technological advancement. Psychological research, for example, may be eligible when it informs the design of human-machine interfaces or medical devices.

What if I’m unsure whether my project has SR&ED-eligible components? 

SR&ED interpretation can be complex, especially in projects with multiple disciplines. Ask for help from consultants to avoid rejections.