Advantage through innovation

Canada’s Scientific Research and Experimental Development tax incentive program is one of the most generous in the world, yet it’s under-utilized by Canadian manufacturers.

August 8, 2011   by Paul Boucher

As the healing from the economic downturn continues, we’re reminded that innovation is critical for business growth. Manufacturers that focused on efficiency, productivity and innovation successfully navigated through the turbulence and are stronger because of their efforts.

The federal government also recognizes the role innovation plays and has lately been reinforcing support for this competitive advantage. The Scientific Research and Experimental Development (SR&ED) tax incentive program is key to the government’s efforts to accelerate private sector investment, enhance the ability of Canadian firms to participate in global markets and create a more competitive business environment. This program is the single largest source of government financial support for industrial research and development (R&D).

Canada has one of the most generous programs in the world, each year providing businesses with about $4 billion in tax credits to support R&D, yet among the 17 countries in the Organisation for Economic Co-operation and Development (OECD), we rank a lowly fourteenth in innovation.

Many businesses have leveraged the SR&ED program as a valuable competitive advantage. One family owned manufacturing company survived the economic downturn and created new market opportunities that will soon double its business. This mid-size manufacturer had been operating in the fabricated metal sector for more than a decade – until the company’s largest customer unexpectedly declared bankruptcy during the recession. Faced with idle machining and assembly and the loss of irreplaceable sales, the management team immediately began investigating other opportunities.

Unfortunately, they could find no significant potential within the company’s own or related sectors. Looking farther ahead, management eventually identified possible opportunities within the energy sector. Since energy is significantly more regulated than their own, they had to develop prototypes for a rigorous approval process. Knowing this would require an extensive investment in R&D, the management team worked with a specialist to evaluate SR&ED opportunities and develop a process that would meet program requirements. This was crucial because many alternative lenders had vanished during the downturn and management had few funding options.

The company submitted a successful claim to the SR&ED program and with the assistance of $200,000 in tax credits, accelerated cash flow and working capital. Within two years management had developed the necessary prototypes, successfully secured several contracts, reconfigured its operations and is now on track to double sales.

This enterprise is one of about 18,000 businesses that use the SR&ED program each year. Since there are more than 84,000 manufacturers in Canada, many more would benefit from the program’s investment tax credits of up to 35% for eligible current and capital expenses – along with additional deductions and credits offered by most provinces.

Identifying opportunities
There are a couple of steps manufacturers can take to identify appropriate R&D opportunities and submit successful claims. For example, when planning significant expenditures the management team should discuss these investments in the context of their potential contribution to research activities. If an investment might contribute to producing new products and processes or improve existing ones, a company may be able claim tax credits.

To identify and monitor R&D activities a company must be able to track them on a current and ongoing basis. This requires integrating R&D practices into the regular business routine, such as adding an agenda item to monthly operations review meetings. Discussing recent activities at these meetings makes it easier to document activities – and to meet requirements of the SR&ED program.

Canadian companies facing the loss of sales volume or entire markets have been investing in new products and manufacturing processes with the assistance of this program, thereby supplementing and sometimes completely replacing a core business. Most (75%) of the SR&ED participants are small to medium-size businesses so the door is open for virtually any manufacturer to enhance innovation and productivity. And there’s never been a better time to assess opportunities for using the program to gain a competitive advantage.

Paul Boucher is the national advisory leader of BDO’s manufacturing industry practice. E-mail or call (905) 272-7831.

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