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Update on Non-Qualified SR&ED Expenditures

The SR&ED program rewards Canadian businesses for investing in innovation. It offers tax incentives for research and development (R&D) that lead to technological advancements. To maximize these benefits, businesses must understand what types of work qualify for SR&ED.  

Activities like routine product updates often fall into the category of non-qualified SR&ED expenditures. This blog focuses on non-qualified SR&ED expenditures. We’ll explore product updates and how to determine if they contribute to eligible SR&ED work. 

Understanding what makes work eligible for SR&ED  requires looking at both the “why” and “how” of a project. The “why” focuses on advancing scientific or technological knowledge and resolving uncertainties. On the other hand, the “how”  involves a systematic approach to investigating and solving problems.

What Drives SR&ED Eligibility?

SR&ED supports work that pushes boundaries in science or technology. This could involve generating entirely new knowledge, overcoming limitations in existing technologies, or aiming for unprecedented performance levels. Moreover, eligible projects don’t rely on guesswork. They involve methodical testing, experimentation, and thorough data analysis to reach solutions.

Allowable SR&ED Expenditures

The SR&ED program recognizes four main categories of eligible work: 
  • Basic Research: Expands scientific knowledge without a specific application in mind.
  • Applied Research: Advances scientific knowledge to solve a practical problem.
  • Experimental Development: Focuses on creating or improving materials, devices, products, or processes.
  • Support Work: Encompasses activities that directly support the above categories.
Ultimately, the concept of technological uncertainty is central to SR&ED eligibility. The program supports projects addressing challenges where solutions are hampered by gaps in current knowledge or technological limitations.

Avoiding Common Pitfalls in Non-Qualified SR&ED Expenditures

You need to be aware of what falls outside SR&ED’s scope to ensure a successful claim. Here, we explore common non-qualified SR&ED expenditures, focusing on product updates.

SR&ED doesn’t cover activities solely focused on maintaining existing standards or ensuring products meet specifications. Repetitive testing of established functionalities doesn’t address technological uncertainties or involve systematic problem-solving.

SR&ED aims to advance science or technology, not understand customer preferences or trends. Activities like analyzing consumer behaviour or developing marketing campaigns fall under market research and sales promotion and don’t qualify for SR&ED.

Once a product is designed and developed, activities focused on ramping up production for launch or making minor adjustments for marketability aren’t eligible for SR&ED support.

The Challenge of Product Updates and SR&ED Eligibility

Product updates can be tricky in terms of SR&ED eligibility. While some updates overcome technological hurdles and require a systematic approach, others focus on improving existing features or incorporating minor design changes.

The key factor differentiating an eligible update is whether it addresses a technological uncertainty. For example, if a company develops a new material for a product to improve its durability under extreme temperatures, the R&D involved could qualify for SR&ED.  However, simply incorporating a new colour option doesn’t qualify as SR&ED activity.

Practice Taking Clear Documentation

Detailed documentation is essential, especially for product updates. Clear records demonstrating how the update resolved a specific technological challenge can strengthen your SR&ED claim. This could include:

  • Project goals and objectives outlining the technological uncertainty addressed
  • Descriptions of the R&D activities undertaken
  • Data and results from testing and experimentation

Now, let’s move on to identifying the gray area of product updates when it comes to SR&ED eligibility. 

While some product updates fall outside the scope of SR&ED, others can contribute to eligible innovation. Even for product updates to qualify for SR&ED, they must demonstrably address technological uncertainty. This means the update seeks to overcome a technical limitation, improve a product’s performance in a specific way, or create a new functionality that wasn’t previously achievable.

Examples of Eligible Product Updates

If a company develops and integrates a new material to address a specific technical challenge, such as improving a product’s heat resistance or weight reduction, the R&D involved can be considered SR&ED. Here’s another example. If a product update aims to resolve a known technical limitation, such as improving signal strength in a wireless device, the research and development to achieve this advancement could be eligible for SR&ED credits. For complex product updates or those with a high degree of uncertainty, seeking professional guidance from an SR&ED specialist is highly recommended. An expert can help ensure your claim accurately reflects the innovative aspects of your product updates.

Avoiding Non-Qualified Expenditures

It’s difficult to figure out SR&ED product update eligibility on your own. You can use the help of a professional consultant. They don’t just identify eligible activities. Professionals can also help you optimize your project documentation to showcase SR&ED-eligible aspects and stay up-to-date on the latest SR&ED regulations.

Turn Product Updates into SR&ED Opportunities

Figuring out eligible SR&ED work and non-qualified SR&ED expenditures is an ongoing process. This helps you focus your innovation efforts where they make the greatest impact. Product updates, while sometimes non-qualifying, can lead to technological breakthroughs that fuel future SR&ED-eligible work.  

Staying informed about SR&ED guidelines and seeking expert advice when needed will ensure you maximize the program’s benefits throughout your company’s growth.