By Mikhail Gogolev, ITC Plus
The Scientific Research and Experimental Development (SR&ED) tax credit program in its current form started in 1986 and has survived a few revisions since then.
It is hard to find anyone in the environmental engineering community who has not heard about this program, but the paradox is that environmental engineers are claiming SR&ED credits more rarely than cabinetmakers or welders. This is due to a number of misconceptions which send a message that the SR&ED program is something very complicated and not to be touched.
About the program
The SR&ED program is the largest source of federal government support for research and development in Canada. Annually, it provides $2.8 – $3.5 billion of tax assistance to a few thousand claimants. Provincial governments also add substantial funding, worth billions of dollars more.
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For small and medium businesses, which most environmental consulting firms are, SR&ED credits come in the form of cash. The credit can be as high as 67% of eligible salary expenses.
SR&ED claims are reviewed by a special branch of Canada Revenue Agency where an engineering expert, called a research and technology advisor, will review scientific eligibility and extent of the claim. The financial reviewer will review the specifics of claimed salaries and other expenses.
The Income Tax Act defines the purpose of the program: “Scientific research and experimental development means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is basic or applied research.”
It also covers: “Experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto.”
Most environmental engineers claim SR&ED expenditures under this category.
The program is designed to assist Canadian businesses in reducing risks associated with developing new and/or improving current technological processes, products, devices or materials. The intent is to stimulate companies to expand their knowledge, products and services.
So why don’t many environmental engineers use this source of additional income? Many believe that the process of application for SR&ED credits is bureaucracy-intensive and involves substantial paperwork. Also, that environmental consulting work is severely regulated and any attempts to change the approved technology of site assessment and cleanup may deem the results of the work illegitimate.
Misconception 1.
Environmental work is always associated with technological uncertainty and, thus, contains SR&ED. SR&ED work begins with identifying technological uncertainty. Rookie SR&ED enthusiasts try to claim that any work performed at an environmental site is associated with technological uncertainty because the soil, geological and hydrogeological structures of the site are substantially unknown and there is always risk of failing when providing environmental cleanup.
Much to their regret, such projects are commonly rejected, the reason being that there is no deficiency in the underlying technology and, with some additional funds and work, all unknown structures may be identified and accounted for in engineering plans.
However, engineers who formulate hypotheses about the nature of underground structures based on deep knowledge of quaternary geology and geomorphology are commonly successful with their projects.
Misconception 2.
Work done by environmental companies does not contain any SR&ED. This misconception is based on interpreting the requirement that site assessment and cleanup work is supposed to meet the applicable guidelines and regulations. This is true for the content of the site sampling and investigation. However, in many non-orthodox cases, inquisitive specialists may perform additional analysis and try innovative methods of site examination and rehabilitation. This work will be gladly welcomed as a SR&ED claim.
What is important is that the experimental work is well planned and the hypothesis on how to solve the technological uncertainty is progressively verified.
Misconception 3.
It is a widespread perception that a successful SR&ED claim should bring some significant discoveries, or, otherwise, it may not pass the CRA review. This is a wrong presumption, because the CRA position wisely acknowledges that even a well-designed experiment may not bring the expected result. What is important is that the experimental work is well planned and the hypothesis on how to solve the technological uncertainty is progressively verified. After all, proving a negative answer to a research question is also a technological advancement.
Misconception 4.
Work performed for a client cannot be claimed. This misconception occurs when the environmental consulting company does some paid experimental work at the client’s site. In fact, innovative experimental work may not be claimable only when the details of the experimental work are specified in the fee-for-service contract with the client. However, this is not what normally happens. Typical contracts describe what results should be achieved but not how to achieve them.
CRA recognises that these contracts are lump-sum arrangements in bulk and the experimental work is funded by the contractor. At complex sites, it may substantially exceed the initial cost presented in the job quotation. Such work may be claimed with one provision: that the engineer has a clear understanding of technological uncertainty and consciously plans the experimental work.
Misconception 5.
Once audited, the chances to get subsequent SR&ED credits vanish. If a company claims SR&ED expenses year after year, a time comes when the claim is subjected to a review by SR&ED team that includes the RTA and FR. However, it is important to know that the auditors only review the claim for the specific tax year and do not go after the previous years, no matter how negative their conclusions may be. In many cases, after a negative review the company stops claiming SR&ED for subsequent years which is a major strategic mistake.
Case studies
The following are two examples of environmental projects that were successful as SR&ED claims.
Dewatering of an excavation. At a condo development in Toronto, wells were drilled, according to the technology standards, to the depth of the underground garage excavation. The wells encountered till deposits consisting of low permeable fine sand, sandy silt, silt and clay. The low permeability of these deposits was considered favourable for the excavation dewatering. However, when the excavation progressed, groundwater started to flow through the garage floor and tie back holes into the excavation.
The claimant hypothesized and further confirmed by drilling deeper boreholes and performing pumping tests that the source of the water was the deep aquifer in the sand formation located 10 m below the bottom of the excavation with high piezometric head values.
This artesian aquifer provided upward groundwater movement either through the overlying low permeable deposits or through artificial conduits such as tie backs.
Through pumping experiments, the claimant identified that effective dewatering of the excavation could be provided by three deep dewatering/depressurizing wells extended into the deep aquifer.
Remediation system for deeply positioned VOCs. At an urban environmental site, high concentrations of volatile organic compounds (VOCs) were identified in deeply positioned groundwater. The site geology featured 8 m – 14 m of silt, underlain by 5 m – 15 m of sand. Groundwater level at the site was located between 9 m – 11 m below the ground surface. The deep position of the contamination made traditional active remediation techniques unfeasible. The claimant came up with a concept of in situ bioremediation.
A series of bench-scale tests were performed to prove the concept and identify the optimal concentrations of the remedial agents.
The problem was that the site started with non-detect levels of specific microorganisms, Dehalococcoides, which were supposed to destroy VOCs. To compensate for this deficiency, Dehalococcoides were injected into the deep subsurface, followed with sodium lactate to stimulate growth of the micro-organism population. This technology worked well for reducing concentrations of VOCs.
Conclusion
The SR&ED tax credit is an effective means of stimulating innovation in the environmental industry and well-organized engineers should not have trouble using it to support their businesses.
Mikhail (Mike) Gogolev, PhD, P. Eng., is with ITC Plus Inc. This article appears in ES&E Magazine’s December 2018 issue.
