SRED Tax Credit Professor

Improvements to existing production equipment may quality for SRED Tax Credits!

The Canada Revenue Agency administers the Scientific Research and Experimental Development program – also called the SRED tax credit program. When companies conduct R&D in Canada they can apply for tax credits for eligible R&D expenses. The Canada Revenue Agency processes thousands of claims each year. A majority of these claims fall under the category of Experimental Development. Experimental Development projects seek to develop NEW or improve an EXISTING technology. Here a technology is a DEVICE, PRODUCT, PROCESS or MATERIAL.

These claims often involve the development of NEW products. Little, if any, Experimental Development claims seek to improve an EXISTING technology. Many process improvement projects are often overlooked. These projects are repeatedly plagued by technological obstacles that inhibit their capability or performance. In many of these cases routine engineering efforts cannot achieve a desired technical aim. In these situations, a course of experimental development is often needed. Such an approach provides a systematic way to investigate alternative paths to solve a problem. When conducting experimental development it requires that we;

1. State the problem in quantitative terms.
2. Distinguish between routine engineering versus experimental development.
3. Conduct a systematic investigation

How to we state operational problems in quantitative terms?
Describing operational problems in technical terms brings structure and objectivity to the problem. It defines, in quantitative terms, the technological base level and technical goal. The technological base level is a statement of the current capability or performance of the system under study. It is often quantified by statistics that define limits of randomness. Using statistics, such as the average and standard deviation, regions beyond random chance define the technological objective and advancement sought.

How to do you distinguish between routine and experimental development?
Routine development assumes a direct line of sight solution to a technical goal. A direct line of sight solution relies on prior knowledge that suggests a path free of technical obstacles. In this case, routine engineering is all that’s needed to meet a technical goal. Thus, the project is commensurate with routine development. In such a case, there is no SRED tax credit.

In other cases, there may be consensus that a technical goal is possible, but many alternative paths to achieve it exist. When it is not known which path is best, a company needs to conduct a systematic investigation to test each alternative path. Such an investigation is consistent with the definition of experimental development and qualifies for an SRED tax credit.

How do we conduct a systematic investigation?
When an investigation is systematic, it implies there is a structured plan of study. Such a study should address hypotheses that will prove or disprove a cause and effect relationship. Often, an engineer or scientist will conduct research and the data does not agree with a deterministic model. In this case, how does the researcher explain or predict the system under study? We learn through a series of investigative steps where we make conjectures about a system. This requires that we perform experiments, generate data, and conduct analysis. This information then leads to new conjectures and new experiments and so on. But the data from such experiments is always subject to error and how we control this error is critical. An effective approach to controlling experimental error is to use statistical experimental design methods. Statistical experimental design is the only effective way to plan, conduct, and analyze experiments.

Benefits
Here is how one company benefited. It put aside $750,000 to buy new equipment to improve production output. They believed its existing equipment could not meet production demand. Yet, the new equipment would eat up more resources, take up more floor space and increase manufacturing costs.

Through effective technical leadership, the company described the problem in technical terms. They defined 16 solutions but had no idea which solution was best and realized they needed to conduct a systematic study. Such a study was consistent with the definition of experimental development. By the time the study ended, existing production increased by 522%. This generated excess capacity that was then sold. Through this course of action, the company realized a profit on the sale of its product and obtained an SRED tax credit.