Companies struggle with SR&ED for software development

Businesses find it hard to apply for SRED for software development. Here is why.

Software Development and ICT companies spend a lot of their time figuring out how to overcome limitations in the industry, but not all of this work can be labelled as “Research and Development” in the eyes of the CRA.

The Canadian government supports R&D through the Scientific Research and Experimental Development program (SR&ED program). It is the largest tax incentive program in Canada and is managed by the Canada Revenue Agency. Every year tens of thousands of businesses get Investment Tax Credits (ITCs) from the CRA for the research they do to expand their knowledge base. In total, they receive about $3Bn in ITCs, about half of which goes to the ICT sector.

Many software companies would like a piece of that pie, but fail when they submit a claim. This is mostly because the work they submit can’t be labelled as “Research and Development”. This article gives an overview of the mistakes software companies make in claiming SR&ED and what you can do about it.

Objective of the Software Development Work

To qualify for the SR&ED programme, software development must be performed through a systematic investigation by means of experiment or analysis, carried out for the advancement of scientific knowledge or to achieve technological advancement. It’s not trial and error: you know you are better than that!

If this applies, then the following five questions need to be answered

• Was there a scientific or technological uncertainty?
• Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
• Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by experiment or analysis?
• Was the overall approach for the purpose of achieving a scientific or technological advancement?
• Were records of the hypotheses tested and the results kept as the work progressed?

You can guarantee that your claim will be approved for SR&ED if all five questions are answered with “yes” and you provide the necessary supporting documentation. (See “How CRA determines if your project qualifies for SR&ED tax credit”)

Let’s look at the most common issues that software development companies experience when they submit a claim for SR&ED tax credits:

Most Common Problems with SRED claims for software development

SR&ED is about new or improved methods and processes

The outcome of an SR&ED project should be that there is a new or improved method or approach to solving problems, not just a new product. This really boils down to asking the 5 questions listed above. A SR&ED claim will only be successful if the scientific method was used to solve a technological uncertainty.

A lot of work done in IT and software development companies does not fall under the SR&ED because it doesn’t lead to technological advancement. Examples include customization and upgrading of existing technology.

Documentation of existing technologies and hypothesis for improvement

Software developers have a lot of open-source and commercial software at their disposal, and use it to create new functionality. This can not be claimed for SR&ED. It requires that there is experimental development with uncertain outcomes.

The limitations of existing technology need to be documented, as well as the hypothesis for an improved technology. For example, if you are inquiring about constraints with technologies online, leave a forum post, or blog comment that you can reference later when you need to show that a limitation existed.

Skill and knowledge improvement

The CRA will rightfully assume that your staff is knowledgeable and technically competent. Have your most talented and experienced Engineers working on the hardest problems. You can’t apply for SR&ED funding for any technical or skills training, or to bring yourself up to speed into existing technical solutions.

You will benefit from speaking to a SR&ED consultant to avoid these common problems and make your SR&ED application successful!

Tips for IT companies

Focus on the technological benefits of your R&D

As a business owner you will normally be inclined to focus on the business objectives when you prepare a grant proposal. However, with SR&ED the focus should be on the technological benefits of your research. So your grant application should show how your R&D has contributed to technological advancement.

In fact, many companies have received SR&ED investment tax credits for technological advancements they have made with projects that did not achieve the business objectives! Even a project that has failed to achieve the objectives may have resulted in a new or improved approach or method.

Adopt time-tracking for your staff

If technological uncertainty has been identified then work your staff is doing is eligible for a SR&ED tax credit and the hours spent on that work must be tracked. Proper project and task tracking is the easiest way to guarantee SR&ED claim wins during a CRA audit. Start this as soon as you can. It’s a small price to pay in time spent, for a large payout at a later date.

The good news is that any technical support who are doing work in support of the SR&ED work is also eligible for a SR&ED tax credit. This is even true for support work that would otherwise not be eligible, as long as it is “commensurate with the needs and directly in support of” the SR&ED work identified.

Look for technological trade-offs and repeated failures

Good candidates for SR&ED support are often cases where you have to balance technological trade-offs. For example, a method may be optimized by more computing power or by better efficiency of the code, and your team needs to find out the optimal balance between the two.

Another example is a situation where your team has tried a number of different ways to solve a problem and had to abandon a number of approaches. These are situations that can be formulated in the framework of the scientific method and can become eligible for a SR&ED claim. Even if you failed numerous times, you still learnt something: which is eligible!

Get help with SR&ED applications

It pays to get professional help from a SR&ED Consultant when you have a software development project that can be labelled as Research & Development. Call on the Conceptinero group to maximize your SR&ED tax credits.