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March 2016

Does my Software Project Qualify for SR&ED?

Does my Software Development Project Qualify for SR&ED?

By | SRED Tax Credit | No Comments

Does my Software Project Qualify for SR&ED?

It is important for firms engaged in software development or interactive and digital media projects to fully understand the funding programs available to them.  One such program is the Scientific Research and Experimental Development tax credit (SR&ED).  Navigating the SR&ED waters can seem daunting, however if navigated properly, can provide your firm with extensive funding potential, with up to 74% of your project expenses returned to you. Even if you are fully aware of this SR&ED tax credit you might be asking yourself a very valid question; does my software project qualify for SR&ED?

Firstly, one must avoid common red herring assumptions about their project and why it would qualify for the SR&ED tax credit.  Namely:

  1. Having first mover advantage to service a given space with your software is irrelevant.  When clients explain that “We’re the first ones to build a ‘x’ type of  system for ‘y’ industry”, we explain that the SR&ED program reviewers couldn’t care less.  The SR&ED program is based solely on technological advancement (regardless of the size of the advancement) and not commercial advancement.
  2. “We spent a lot of time and money on this project.”  In and of itself, this is quite irrelevant.
  3. “No one has ever done this before”.  See point 1.
  4. “My friend who built a relatively simple system was able to claim the SR&ED tax credit successfully”.  Each claim is different and what may come across as simple on the outside can have significant technological complexity.  Even if a colleague has successfully claimed what seems to be a bogus SR&ED claim, they will get caught eventually and when they do dealing with CRA will be a costly, time consuming and painful process.
  5. Next, and closely related to the previous point, one shouldn’t assume that because your in-house built system offers similar functionality to that of a competitors system that you are ineligible for the SR&ED program.  Remember that if the knowledge base required to achieve the same functionality or performance of a competing system is not available in the public domain or considered part of the routine knowledge base of an expert level software developer, your project may still very well be eligible.

Main SR&ED Guidelines

One of the main SR&ED guidelines is that your project advances your company’s knowledge base in its associated field of science or technology.(Read more on the SR&ED tax credit in our post from November 2015). For software development projects, that boils down to:

  1. Identifying platforms, methodologies or techniques that were applied to your project but would considered “routine” engineering by expert level practitioners.
  2. Did your work require experimental development iterations that went beyond routine software development?
  3. Did your development work achieve a systemic advancement such as the integration of two platforms not designed to communicate with one another?  What about performance metrics beyond published capabilities of integrated platforms?

If you can answer points 2 or 3 in the affirmative, isolate the work associated with these advances in your knowledge base to form the basis of your SR&ED projects.  Next, you’ll need to demonstrate how the advancement came about.

Is Trial and Error Eligible?

As per CRA’s SR&ED’s guidelines your advancements must have come about using the scientific method.  In other words, trial and error is NOT a valid method.  Why?  Simply put, trial and error strategies are merely result-oriented.  Outcomes generated through trial and error are seldom repeatable, transferable or maintainable and rarely increase one’s knowledge base.  Without knowing why the combination of inputs resulted in a successful result, we have not increased our knowledge base.  Rather, a more scientific approach should be applied and demonstrated by showing:

  1. Your work was documented.  Note that software code with comments in the source code or check-in logs count, but as a bare minimum.
  2. Each development iteration was based on an informal hypothesis. Ideally you would have some documentation discussing notable potential solutions and explaining why a chosen path was selected.  Atlassian’s Confluence is an excellent platform to capture this type of data.
  3. Some form of time tracking system or reasonable estimation strategy (extrapolated from data such as calendar bookings, emails, etc.) was used to determine the number of hours spent on the project.

Determining and demonstrating how you were able to extend your company’s knowledge base beyond the publicly available knowledge base is the key to determining whether your software project qualifies for the SR&ED tax credit.

For further details book a free consult  with our Montreal based SR&ED consultants will assess your projects and discuss your options.


Changes to Ontario's ORDTC Tax Credit Percentages

Changes to Ontario’s OITC & ORDTC Tax Credit Percentages

By | Ontario Research and Development Tax Credit, SRED Tax Credit | No Comments

Changes to Ontario’s OITC and ORDTC Tax Credit Percentages

The SR&ED tax credit along with their ecosystem of partner tax credits are always in flux.  Keeping on top of the latest changes in all of Canada’s is no easy task.  Here are the latest up dates to come out of the Ontario Government’s 2016 Budget titled “Jobs for Today, Jobs for Tomorrow.”

The Ontario provincial government announced the following changes in their latest provincial budget. These changes will mainly affect what are called “top up” programs. Credits for these programs are usually claimed in conjunction with the SR&ED tax program. One of the more significant of Ontario’s Provincial “Top Up” program is called the the Ontario Research and Development Tax Credit (ORDTC).

  • The Ontario Research and Development Tax Credit (ORDTC) will now sit at 3.5% as opposed to 4.5%
  • Whereas the Ontario Innovation Tax Credit (OITC) will currently be applied at 8% rather than the previous 10%

It’s important to note that these changes will affect eligible SR&ED projects and expenses generated or incurred in the years that end on or after the 1st of June 2016.  All of those on your team involved tracking SR&ED activities should take note of these changes.

Still not quite sure if you project qualifies for SR&ED tax credit or how these new changes in Ontario’s budget will affect funding for your SR&ED projects. Book your free consult today.