The Scientific Research and Experimental Development (SR&ED) program was created in Canada back in the 1980’s to encourage Canadian companies of all sizes and backgrounds to spend more money on developing new technologies and processes. Over the years, this program has become the most important incentive program for R&D in Canada, with over 90,000 companies claiming and over $4 billion credits returned annually.
As successful as this is, only a small percentage of Canadian companies that are eligible are making claims. There are various reasons for this, including a lack of knowledge of the program, having to pay for the R&D up front (SR&ED is a back end credit program), and a complicated and daunting filing process. But one common reason we often hear is that most small companies just don’t have the expertise to do their own research.
While the SR&ED program, by no means, requires that a company has an army of PhD research scientists on staff, it is understandable that small companies are intimidated by the prospect of trying to set up a proper research program that has any hope of solving their technological problems or developing the new technologies they need.
Luckily, there is an option, and one that is supported by the SR&ED program. This is called Third Party Payments.
What are Third Party Payments?
A Third Party Payment, as defined by the SR&ED program, is a payment that a company gives to an approved research organization in Canada to conduct R&D on their behalf. Approved organizations generally means Canadian universities or government research agencies. Most of these organizations will eagerly take on a research project at the request of a private company who is willing to pay them for their efforts.
There are a couple stipulations to these payments. First, the company must be involved in the research, not just giving a donation to the organization. This can be as simple as attending regular progress meetings, or providing samples or facilities to the research organization.
Secondly, to qualify for SR&ED, the company must be able to benefit from the research. This can be a little trickier, as often organizations like universities like to retain the intellectual property coming out of the research that they perform, even if funded by a private company.
There are a number of scenarios that can qualify for this last stipulation, and a company should be aware of them when entering into an agreement with a third party.
- A company signs a contract with the third party stating that all intellectual property developed through the agreement is the sole ownership of the company. This is the best method to meet the qualifications, but often the hardest to find a research organization that will want to give up their rights to the IP.
An example of an organization that will do this is the Prairie Agricultural Machinery Institute (https://pami.ca/). PAMI is a Western Canadian, quasi government research institute. They pride themselves on working for the companies that contract with them and guarantee that the intellectual property remains with their customers. Many machinery manufacturers (agricultural and otherwise) have utilized their services to develop new machinery or do specific testing for them.
- The research organization retains ownership of the IP, but the company signs an agreement for exclusive use for a certain period of time.
An example of this type of arrangement might be the Saskatchewan Research Council (https://www.src.sk.ca/). The SRC aims to develop and commercialize new technologies while balancing the best interests of SRC, the public, inventors and its clients.
- The research organization retains ownership and wants to publish the findings as soon as possible. Even in this situation, it is possible to show that the company can benefit from the research, and simply by supporting the research and being involved in it means they have the advantage over others that will be getting the knowledge through scientific journals months down the road.
Examples of this are any Canadian university. For instance, the University of British Columbia (https://research.ubc.ca/support-researchers/building-partnerships). UBC is a consistently top ranked research university in the world with programs ranging from life sciences, to food science, to artificial intelligence. They have a dedicated industry outreach program to build partnerships and enter into contract research with Canadian companies.
Is there any other way of benefiting from Third Party Payments?
One other method of claiming Third Party Payments, and one the is sometimes overlooked is research done by industry organizations. Some of these organizations collect a fee from their members, some of which they use to support research that will benefit their industry. For example, the Saskatchewan Pulse Growers Association https://saskpulse.com/research/sred-tax-credit/ collects an annual levy from their members. This is then used to fund various university research programs working on things such as improving pulse crop genetics. As the SPG is not SRED eligible, this R&D expenditure is then passed back to the individual members, who can then claim it on their next tax return. Check with your industry association to see if you may be eligible.
Ok, I’m interested, but how do I make a Third Party SR&ED claim?
The good news is that Third Party Payments are the easiest way to make a claim into the SR&ED program. Only a small paragraph that describes the research is needed, and the likelihood of getting audited is greatly decreased as, by their very nature, these research organizations always conduct rigid scientific investigations.
If interested, or want to know more, please contact us.
Written By: Phil Winter (P.Eng., M.Sc.)
