SR&ED process dampens ambitions and innovation

Research and innovation are important to this small manufacturing firm, but it can no longer rely on the SR&ED tax credit to help it maintain a world-leading product.

In today’s world of intense global competition, many Canadian companies compete through continuous research and innovation. Coretech Engineering*, a small company based in Milton, Ontario, has carved out a lucrative niche in the energy sector, developing and manufacturing precision-made components that help squeeze more efficiency from renewable energy generation.

Initially, the company relied on the federal Scientific Research and Experimental Development (SR&ED) Program to supplement their investments in developing and commercializing technologies for sale in Ontario and around the world. The program lets companies deduct SR&ED costs from income for tax purposes, and provides an investment tax credit to reduce income tax bills. As Coretech constantly sought to enhance its technology by improving designs and using new materials, the extra money helped them stay on the technology’s front line.

Yet as time went on, a process that was once straightforward became increasingly complicated as the Canada Revenue Agency (CRA) asked more questions about the work done. The CRA’s interpretation of what it considers eligible for credit seemed to be much more restrictive, and Coretech’s claims ultimately became bogged down in audits. 

When the small company added up the staff time required, the back and forth during audits, and the costs of filing claims, applying for the credits no longer made any economic sense. Innovation remains part of the company’s DNA, but they had to scale back their ambition, with a smaller budget and fewer employees focused on the research and testing needed to maintain a world-leading product.

*This is a real case study provided by a CPA member. Names and places have been changed to protect privacy and sensitive financial information.