Customized ERP systems can qualify for tax credits. Photo: iStock
Canada’s Scientific Research and Experimental Development (SR&ED) program doesn’t sound like a practical source of funding for the average small and medium size business.
But you don’t need a research lab to claim SR&ED credits. They can be used for applied research which has a “specific practical application.”
If you’re changing manufacturing processes, then you should consider SR&ED. If you’re solving a technical problem that doesn’t have an otherwise documented solution, you’re probably eligible for the program.
If you’re solving a problem that involves “system uncertainty” where solving the problem would create an advancement, then you might well be eligible.
Costs associated with implementing or upgrading ERP, such as customizing your ERP system to solve a problem that qualifies; or upgrading ERP as an essential part of the solution to a qualifying problem, can potentially be part of a SR&ED claim.
Obviously, this doesn’t include a straight out-of-the-box implementation, but customization can qualify and you don’t even need to be the one doing the customization.
The program lets Canadian-controlled private corporations under $500 million in net income claim 35 percent of eligible expenditures. Larger organizations can claim up to 15 percent of expenditures as investment tax credits.
The credits are refundable for companies that qualify for the 35 percent rate, so you don’t need to be profitable to benefit from SR&ED.
The main eligible expenditure relevant to ERP projects is wages, which includes consultants and support staff. Until recently, you could also claim capital costs, such as servers, but that is no longer the case.
Most provinces have additional credits you can claim through the federal SR&ED program. Your eligibility isn’t solely determined by what you’re doing, but also how.
“In order to answer the CRA’s SR&ED requirements,” said Jeff Christie, vice-president with SR&ED consultants Boast Capital LP, “you need to be able to answer three questions.”
“What is the advancement sought on a technical level? What are the challenges associated with that technical goal? What is the iterative process that you go through to overcome the challenges on a technical level?”
Tracking the details
Documentation can be a bit of a challenge for first time applicants.
You need to document everything throughout the process, including what was done and who did it. This includes failures on the path to success.
“Tracking the details for SR&ED is onerous,” says Elizabeth Carswell, chief financial officer with Optech Inc., the makers of the lidar technology aboard NASA’s Phoenix Mars Lander, which touched down near the Martian North Pole on 25 May 2008.
Optech handles all of their SR&ED tracking requirements in their SYSPRO ERP system—showing another point where ERP and SR&ED touch.
Ideally, you should plan your documentation in advance. It’s cheaper to have a good plan and follow it, but artifacts such as code comments and emails can go a long way towards proving your eligibility after the fact if your project isn’t too big.
While it is possible for first-time SR&ED applicants to meet their documentation requirements independently, it’s more common to employ outside consultants to help set up documentation procedures in the format that Canada Revenue Agency evaluators prefer.
These consultants often accept deferred payment upon receipt of the tax refund, usually three to six months after filing the claim.
“You should never pay up front to have someone prepare your SR&ED claim for you,” says Christie, who has worked with hundreds of companies to successfully claim SR&ED. “Make sure you have them work on a contingency basis. That way, they are as invested as you in seeing a successful claim.”
SR&ED isn’t going to help pay for every ERP project, but the types of manufacturing process improvements associated with ERP projects and advanced customizations can qualify and the savings can be substantial.
• Official SR&ED Canada Revenue Agency Page
• Provincial and Territorial Credits
• SR&ED FAQ
• Summary of Recent SR&ED Cuts
Odete Passingham is the marketing director at SYSPRO Canada. SYSPRO is an ERP application consisting of finance, distribution and manufacturing controls for mid-size companies. To contact Odete, email: email@example.com or call (604) 451-8889. Learn more about SYSPRO at www.syspro.com
This article is part of the Manufacturing Growth & Innovation Centre, showcasing strategies for manufacturers on the move.