Tax incentives aid advances in technology

Many companies are not taking full advantage of the Scientific Research & Experimental Development (SR&ED) tax credit program.

Costs that companies incur in the ongoing process of advancing technologies, or while attempting to solve mining or processing problems, may qualify for many thousands of dollars in tax credits or refunds. The federal tax credit ranges from 20% to 35% of costs incurred, depending on the company tax situation, and there are additional provincial incentives that further increase the potential benefit. Surprisingly, it has been estimated by various sources that 10% to 40% of eligible costs in Canada are claimed, even though more than $1 billion in credits is granted annually by Revenue Canada.

Reasons for this under-claiming are varied. Perceived difficulty and complexity of the claim process is one; awareness of the scope of the program is another. As well, the difficulty company personnel experience in identifying eligible projects, and measuring the costs, continues to be a problem.

In extractive industries, the situation has perhaps been more confusing because routine activities with respect to prospecting, exploring for, or producing minerals, petroleum or natural gas are specifically excluded. However, any of a broad range of activities where (1) a technical advancement is attempted (2) the outcome is uncertain and (3) a testing or experimental process is involved, will generally qualify. Far from being a “white-lab-coat-only program, these credits reward the incremental advances that build a strong industrial base.

What types of projects qualify?

Certainly, projects such as the development of robotic mining methods or new remote-sensing techniques are clear candidates for an SR&ED claim, but these are only the tip of the iceberg. More frequently, projects are not so clearly identifiable, and they go unrecognized in the bustle of making it work. One must identify and “carve out these SR&ED projects from otherwise routine activities.

For instance, the companies that are most likely to qualify for SR&ED tax credits are those that have been developing methods or equipment to extract ores, deal with wallrock instability or solve metallurgical problems. Other candidates are those that have been working to optimize mill and smelting recoveries.

How can projects be identified in practice?

Suppose the ball mills for grinding ore at a mining company have been operating unsatisfactorily. Objectives are set to improve the output particle size distribution and total throughput. Company personnel or consultants work towards a solution, and a testing program is undertaken. Automated grind control is proposed, and a computer, together with particle size monitors, is installed on one ball mill.

Testing is carried out while commercial-scale grinding continues. Data are collected and, based on the analysis of these data, numerous modifications are tried and some adopted. Whether successful results are attained or not, the company advances its understanding of methods for improving output results. Therefore, an SR&ED tax credit claim can be made by the mining company.

What activities and costs are likely to be allowed?

Basically, only those costs that are incremental and directly related to SR&ED will be eligible. The cost of consultants, in-house labor, overheads and materials consumed in the testing and analysis are eligible. Routine costs of grinding the ore while in commercial production would not be eligible. Similarly, the cost of computers and sensors would generally not be allowed if they are eventually used in routine production. There are numerous pitfalls to be avoided in the identification of activities and their costs, and expert advice is recommended.

The SR&ED credit is applicable to a broad range of industries and technologies. Management should conduct a careful review of all technological activities during the past few years. This review may well reveal many thousands of dollars in tax credits available to improve the bottom-line performance.

— The author is with Braithwaite Technology Consultants of North York, Ont.