R&D graphic G6 Consulting

R&D vs SR&ED – What’s the difference?

Lots of people struggle with the difference between R&D vs SR&ED.

“Research and Development” is a phrase used to denote activities, the overall goal of which is to gain and use knowledge. These activities are normally well organized, making use of the methods of various branches of knowledge and the services of highly trained personnel. Scientific research and development (referred to generally as “R & D”) signifies activities focused on the natural sciences rather than the humanities and social sciences. R & D is usually classified, according to its aims, into 3 broad categories: pure research, applied research and development. Pure research is curiosity oriented, undertaken to advance knowledge for its own sake; applied research is carried out in anticipation that its results will be useful to technology; development is concerned with transforming technological knowledge into concrete operational hardware.

Scientific Research and Experimental Development is a Canadian federal government program which uses tax credits to incent private enterprises to perform R&D in Canada.  The SR&ED Program has been in existence since 1986.  It is administered by a standalone group within CRA.

SR&ED covers all three categories of R&D noted above.  The government notes that most work funded under the Program is applied research and development as opposed to pure research.

Government R&D tax credits are available to qualifying Canadian corporations doing innovative work or solving technical challenges in their day to day work.

In 2018, over $3 billion was awarded to 18,000 Canadian companies.  That is the biggest R&D credit program in the government.  It dwarfs dedicated R&D programs like IRAP or NSERC and is about 5 times the size of RESP credits disbursed.

Start-ups who have incorporated in Canada and who have staff on a regular payroll are a particularly well-served group under this program. Your qualifying expenses (payroll, prototype materials and qualifying subcontractors) attract credits at well over double the rates paid to large corporations.  Also, all credits are paid to you in cash.  You do not need to show profits to qualify for SR&ED.

SRED is defined in the Income Tax Act (ITA).  Deep in the ITA, page 2709:

“Scientific research and experimental development” is a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis… for the purpose

of creating new, or improving existing, materials, devices, products, or processes, including incremental improvements thereto.

Along with the experimental work itself, scientific research and development also encompasses what the ITA terms supporting activities.  Again, direct from the ITA:

“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 (above).”

R&D vs SR&ED

So, what is the difference between R&D vs SR&ED generally?  SR&ED is a subset of R&D. SR&ED is the portion of your R&D work where you are actively searching and experimenting to overcome a technological obstacle or unknown.

Here is an example of R&D vs SR&ED.  Say you are a bicycle manufacturer and you are not happy with the reliability of your painting process for red bicycles.  Red is the most popular bike color, but it is your most problematic paint to apply reliably. In the summer production months, with high shop ambient temperatures and high and variable humidity levels, the adhesion of your red paint is poor. Also, testing shows that the red paint thickness levels vary widely across different parts of the bike frame.  You know from your logging of warranty repairs that a consistent thickness of paint deposition is key to long term paint adhesion, and resistance to paint chipping and fading.  You enter a due diligence phase where you search for different industry or standards-based solutions to your paint challenges.  This work may include exploring alternatives with paint suppliers, consulting coatings experts and collaborating with other local manufacturers who have experience with paint application in hot environmental conditions.  You pick some promising techniques to determine whether they have applicability to your situation.  This work you are performing is certainly R&D, but it is not SR&ED.  Researching and testing standard industry solutions is considered to be product selection.  It does not rise to the level of experimental development.

After exhausting standard solutions, you decide to start an experimental development project to deliver all-season reliability to your red paint application process.  You hypothesize that a multi-stage painting process is required to deliver reliable long-term red paint application.  You theorize that running your bike frames twice through a modified version of your existing paint line, once wheels-down and once wheels-up, will deliver a consistent reliable result.  Experimentation shows some promising results for this new process, especially for horizontally oriented sections of the bicycle frame.  The depth of paint deposition achieved is much more consistent on those horizontal frame elements on the top and bottom of the tubing vs our single pass “wheels-down” production paint process.  There are still deposition problems on the bike main diagonal tube and in complex join areas near the bicycle crank.  You conduct further tests with 3 and 4 passes of paint deposition, with the frame oriented differently for each pass.  The 4-pass paint process yields excellent results, even under the worst simulated temperature and humidity conditions.  You have now learned something important.  But a 4-pass paint process wrecks your unit manufacturing costs and your cycle time goals for producing 18 bicycle colors.

You experiment with ways to achieve 4 pass paint reliability with a maximum of two passes through your bike paint operation.  You achieve promising results with a modified conveyor which rotates the bike frame through multiple axes as it goes through your paint process.  This process achieves much more even deposition of paint using only two passes.  You experiment with sacrificial coatings where the paint thickness is still too great.  Finally, you add targeted sprayers to the final coating pass at the end of the line when the frame is no longer rotating.  These sprayers precisely add paint to the last undercoated frame areas.  Testing confirms a completely reliable red paint process.  Your SR&ED project is concluded successfully.