G6 Consulting Inc Canada's R&D Tax Credit Experts

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 (SR&ED, SRED) is a Canadian federal government program which uses tax credits to incentivize private enterprises to perform R&D in Canada.

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 colours.

 

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.

SRED Tax Incentive Considerations for your Engineering or Software/IT Consulting Project

It is important to know the rules for claiming SRED work for your engineering or software/IT consulting project both as a subcontractor and as a business paying subcontractors