How Canadian startups can prepare for SR&ED


This article was originally posted on PwC Canada.

Let me ask you a question: is the federal government doing enough to support the development and growth of the Canadian high tech industry?

It’s an important question, with wide-ranging implications for the future of our tech industry and national economy as a whole. But it’s also a provocative question, one that elicits strong reactions and sharp opinions.

For those who see the glass half full, the federal government’s “innovation agenda” is a strong endorsement of Canadian tech, and the multi-million dollar sponsorship of five high-tech superclusters spanning the country is an immensely positive development. The ongoing support of the Scientific Research and Experimental Development (SR&ED) tax incentives is another example of government affirmation of the tech startup ecosystem.

Those who see the glass half empty will point to the inordinate amount of red tape when it comes to claiming SR&ED and similar incentives, and an ongoing stubbornness to respond to a changing tax climate south of the border.

Personally, I see both sides of the argument, particularly when it comes to SR&ED. As a Professional Engineer and Entrepreneur, I’ve had personal experiences as a SR&ED claimant, working for a number of startups with successful exits. I’ve also been in tax services for the past 12 years, helping first-time SR&ED claimants and serial entrepreneurs, as well as larger tech companies through the claim preparation and review processes; and acted as a specialist advisor to venture capitalists and private equity firms performing tech valuations.

SR&ED has its challenges. But it also allows for ideation, experimentation, and refinement of your IP—a key way to develop your business and take it to the next level.

All of this experience has given me an in-depth perspective on how complex and frustrating the SR&ED claim and review processes can be. Reviews of SR&ED claims can be a significant burden on already overextended tech executives and technical resources. I’ve seen how the expectations of the CRA’s technical reviewers don’t always align with real-world project methodologies, much less best practices or current tools and technologies. It also frustrates me that the CRA review process can actually discourage companies from claiming, even though they may be a successful claimant.

But I’ve also seen firsthand how incredibly transformative SR&ED can be, including benefits that go beyond the actual tax credits earned and the resulting financial benefits. Simply put, the process forces companies to improve the continuity of their developed products by augmenting tracking systems, developing a project methodology and creating a more open and transparent development environment. If our tech companies can learn how to take full advantage of it, SR&ED can help make the bright future for Canadian tech even brighter.

So how can you, the Canadian tech entrepreneur or executive, capitalize on SR&ED? And how can the process make your company stronger, more focused, and more successful? Here are some tips, based on my observations and experiences.

Be prepared for the demands of SR&ED

Part of the difficulty that can be encountered with SR&ED lies in the disjuncture between the typical “fast-and-fluid” startup culture and the process-driven, linear demands of the SR&ED program. Today’s successful SR&ED claimant isn’t necessarily the company that is making the biggest, most-apparent advances in technology. Instead, it’s the company that has enough rigor in their project methodologies to contemporaneously capture the key facts about the work that has been performed.

Capturing facts in a timely and efficient manner is key and can provide benefits beyond SR&ED; proof of the R&D performed in product development can be a key component of establishing the value of developed technology. It can also provide the means to share findings and knowledge gains across technical teams. It can also play a critical role in protecting one’s developed intellectual property. Given this, it makes sense to recognize the need to track the technical work performed, noting that there are multiple audiences for this type of information, and to shift into this way of thinking at the start of the development process.

Get your facts in order

SR&ED has existed in more or less its current state since 1985. But CRA reviews are now much more fact-based, and more focused on practicalities and measurable data, which adds a layer of objectivity to the review. This objectivity is designed to work in your favour, as long as you know how to properly prepare and submit your claims. Claims should no longer be subjected to opinions simply being put forward by CRA reviewers: results are now determined by an analysis of the facts of the work. However, it is up to the claimant to present and substantiate the relevant facts!

It’s better to be polite and respectful of the tasks assigned to the reviewer and strive to see the process be completely in a timely fashion.

Long before submitting a claim, companies should be tagging their work (recognizing “experimental development” from “routine development”), documenting key facts, and have a method of either tracking, or systematically deriving, the time spent on specific activities. Note that tracking should not be limited to “eligible activities”: claimants need to be able to show eligible and ineligible time to give reviewers comfort in the process followed to prepare the claim.

This type of fact tracking may not always come easy to teams, but preparing and collecting the right artefacts, such as planning documents, photos of whiteboards, notebooks, meeting minutes, emails, test protocols & results, and even videos will be immensely useful for creating sets of real data that can support SR&ED claims. Plus, revision control systems (e.g. Git, Subversion, SourceSafe, CVS, etc.), and ticketing and Kanban systems (e.g. Jira, Pivotal, Asana, Wrike, Trello, etc.) can provide critical data; you just need to understand how to put the data into context for the CRA in order to substantiate claims.

Not only will this type of tracking/data help startups prepare their submission, it will also help in the fight for objectivity in the process and add a level of predictability to the claim process. Predictability has been one of the chief concerns and criticisms of the SR&ED program for many years.

Be pragmatic (and polite)

The more practical you can be in providing the CRA with the information they need to complete their review process, the more likely you’ll enjoy a positive outcome. Sure, the process isn’t perfect. But take it from someone who has lived through it personally and has spent hundreds of hours in CRA review sessions: it’s better to be polite and respectful of the tasks assigned to the reviewer and strive to see the process be completely in a timely fashion.

Note that this doesn’t mean that spirited discussions regarding technologies and the challenges faced should be avoided; rather, any arguments should come down the facts. Facts that can be substantiated are tough to dispute.

Embrace “failure”

The value of the SR&ED application goes far beyond the tax credit itself. Being rewarded for being innovative and able to ideate and experiment, so that your company can be competitive in a complex global market is a key consideration. Beyond that, SR&ED claims can help you to clearly articulate your IP, so it can be communicated to clients and investors, and defended against competitors. Above all, it gives you the opportunity to “fail”—to experiment with ideas that you may otherwise not attempt for lack of funds, so that you can eventually arrive at improved or new technologies and approaches, and ultimately better products. If that’s not success, I don’t know what is.

Make no mistake: SR&ED has its challenges. But it also allows for ideation, experimentation, and refinement of your IP—a key way to develop your business and take it to the next level.

For startups preparing a SR&ED claim, sound advice from experienced advisors can help. There are also a number of other incentive programs that Canadian businesses should get to know. Get in touch to determine your eligibility.

Photo via Burst.


Leroy Dougherty

As a Professional Engineer and the leader of PwC's Scientific Research & Experimental Development (SR&ED) & Incentives team, Leroy makes practical and effective use of his experience as an entrepreneur, prior SR&ED claimant, and years of claim preparation and reviews for both large and small corporations. He has been a technical consultant for over twenty-five years and has eighteen years of SR&ED experience, as both a claimant and technical advisor.

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