Today’s economy of changing tastes, convenience needs, and dietary restrictions, motivated by a growing consumer base focused on making health-conscious and easily accessible food choices, has brought research and experimental development activities to the forefront of the food and beverage industry. This ever-evolving demand is the basis for the development of new products and a crucial step in refining existing products and processes. To recognize these important activities, the Canada Revenue Agency (CRA) administers the Scientific Research and Experimental Development (SR&ED) Tax Credit claim program, providing a tax credit on eligible R&D expenditures related to product or process development including labor, materials, and subcontracting costs.
The SR&ED program can thus have a significant impact on the affordability of product development. But SR&ED isn’t solely concerned with your R&D team: Eligible SR&ED costs and claims may be initiated, supported, or documented in other operational areas, especially quality assurance and food safety. Both of these areas are fundamental parts of any food and beverage company’s daily operations, and they present a typically well-authenticated opportunity to initiate, support, and document experimental development activities and associated costs. As two departments that rely heavily on documentation and analysis, quality assurance and food safety are not only important to a business’s bottom line, meeting industry standards, and quality production, but also offer a wealth of information that can lead to SR&ED claims that were previously missed or undervalued.
Quality assurance and food safety are not in and of themselves SR&ED tax credit eligible, as standard quality assurance and food safety practices and procedures are not claimable costs under the program; however, both can relate to eligible experimental development activity projects in a variety of ways. First, quality assurance and food safety projects may be a center of SR&ED project initiation if they instigate work that goes beyond standard operating procedures and instead seeks to resolve a recurring or prevalent issue in a way that expands your company’s, or your industry’s, knowledge base. Second, it is quite common that quality assurance and food safety activities support SR&ED eligible R&D projects within your facility, especially in terms of data collection, testing, and analysis, as well as process augmentation to assist with new product development or overcoming current product challenges. Finally, both food safety and quality assurance activities can provide well-documented, reliable, and contemporaneous support for other eligible projects, a key requirement of the SR&ED program.
Routine quality assurance testing and standard product qualifications are not SR&ED eligible costs, but these same operations can be a starting point for SR&ED projects. Quality assurance can often be an initiator of eligible projects; for example, inconsistent processing results or a sudden and unexpected decrease in yield or quality identified in the quality assurance department may prompt investigation and problem solving, leading to a project that requires knowledge base growth. These projects can also be instigated by processing result, quality, or yield concerns that arise from new product development where quality assurance identifies work needed and initiates new projects.
Due to evolving consumer demands, many companies are looking to remove functional ingredients from their products, such as lactose, sodium, or gluten. However, removing an ingredient or altering the chemical composition of food products often results in unintended and undesirable changes especially when the ingredients have functional properties. These can range from a change in product texture or appearance, usually the result of functional ingredient removal such as eliminating gluten or salt, to a decrease in shelf life due to the removal of a preservative agent. The removal of sodium, for example, can alter the moisture absorption properties of a product or cause necessary modifications to cooking methods. In this case, quality assurance work acts as a support to an eligible SR&ED project, namely by resolving these quality issues, whether as a result of additional tests undertaken, longer term testing, or more complex data collection. Regardless of the focus of this research and development, whether it be for new products or modifications to an existing product line, work done to overcome these challenges and ensure product quality is often SR&ED eligible.
Quality assurance, especially in the food and beverage industry, often provides a repertoire of detailed documentation that can lead to an eligible SR&ED project your company has already engaged in. Often, documentation, samples, and records of tests undertaken as part of quality assurance can better define SR&ED eligible projects or can be used as supporting documentation. Trends in quality assurance, industry certifications/regulations, customer demands, have led to an increase in documentation in the food and beverage industry, and as a result, complete project stages are now more identifiable and substantiated, especially in relation to compiling a full timeline of issues, data, and tests run. Not only can this documentation be used to track a SR&ED project, but also the data can be used as proof of uncertainties/issues, work undertaken, and the successful resolution of your projects, and can establish timelines and scopes of trials.
Food safety is just as crucial as quality assurance when it comes to supporting or initiating SR&ED projects. New product development and certification will often result in a variety of collected data from your HACCP or food safety officer. In analyzing this data, you may realize that a product does not meet an established standard, and any subsequent work to comply with food safety norms demonstrates an instance where food safety can initiate an eligible project. In the same way, if food safety concerns arise as a result of microbial testing, for example, this may lead to an investigation into pasteurization techniques or studies in cooking/storage temperatures specific to the product. The work undertaken to resolve these negative concerns may very well be a viable part of your SR&ED tax claim, and your food safety work and data can be support activities within this claim. Work with extending or modifying shelf life can also fall under this category. Again, while each food safety project may not be SR&ED eligible, they can often lead to SR&ED project initiation or support claims related to other departments within your food and beverage company.
While utilizing the quality assurance and food safety departments as a tool to identify additional SR&ED eligible costs, you should consider third-party testing and other subcontract work. For instance, product developments or re-developments often require additional microbial, nutritional or property analysis testing performed off-site by qualified laboratories; however, performing testing through third parties means you may not be able to recapture all incurred expenses. Recent changes to SR&ED eligibility dictate that only 80 percent of subcontractor costs can be claimed as part of an eligible project, but this can still result in a significant recuperation of expenses. This is especially important given evolving standards provided by Health Canada related to food and beverage products that may necessitate an alteration in product composition to achieve different nutritional values. Some examples of tests that might be undertaken by subcontractors that may be eligible as supporting costs of a project include component analysis, such as vitamins, minerals, fat, or sodium; water binding/activity analysis; microbial testing; food spoilage analysis; and chemical composition analysis. It is also important to note that these third-party contractors must have a Canadian business number in order for their cost to form an eligible part of an SR&ED claim.
As proof of work undertaken, SR&ED claims rely on accurate, updated, accessible documentation to prove what work was completed and what costs were incurred. This might include tracking of formulations changes and batch sheets, analysis, brainstorming meeting notes, and project planning documents, as well as expenditures tracking of hours, contracts, material purchasing orders, scrap reports, and other proofs of cost associated with your projects. Hour tracking is especially important because eligible overhead expenses are calculated based on these labor totals. Eligible overhead expenses, calculated using the proxy method, have decreased from 65 percent of incurred labor costs to 55 percent in 2014, and this lowered eligible cost reinforces how crucial it is to capture all of associated costs and ensure you are receiving a tax credit that accurately reflects the work your company has done.
As you can see, there are many types of projects that are or may be eligible for SR&ED in the food and beverage industry, and regardless of the project focus of your SR&ED claim, it is essential to assess what information in your quality assurance and food safety documentation may help complete or substantiate your eligible costs and project progression. This article is meant to help you understand possible SR&ED costs for your company, but remember that SR&ED projects can span many different types of development work, including new product development, increased capacity and capabilities, new or modified packaging, ingredient reduction or elimination, functional product removal, new testing methods, equipment development and shelf-life experimentation, among others. The most important thing to remember is that any eligible SR&ED project must be substantiated by thorough and complete documentation, capturing all incurred expenditures.
With such a wide range of possible projects, the CRA’s SR&ED tax credit program can have significant tax implications for your business, and understanding eligibility can have a large impact on the success of your claim. With $3.6 billion in tax assistance provided in 2012 alone, ensure that you are receiving your slice of the pie.
DesRoches is a technical writer and client manager at NorthBridge Consultants, a professional consulting firm in Canada that assists companies secure grants, tax credits, and alternative financing from government agencies. Reach him at [email protected].
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