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Practical R and D Really Pays Off (Posted On: Thursday, June 26, 2008)

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Small businesses must adapt and innovate to prosper. But, few business owners know that innovation investment can qualify for R&D tax credits and actual refunds. They are missing out on big $ refunds that are available to just about any business.

Aurora-based Balsam Tool and Machine Ltd. may seem an unlikely pacesetter in scientific research, yet they have found new ways to innovate and to serve more customers through R&D projects.

Balsam has also received tax refunds by means of the Scientific Research and Experimental Development (SR&ED) program facilitated by the Canada Revenue Agency.

Now a second generation company, Balsam’s strengths come from more than 30 years in tool and die development and in stamping, primarily for the automotive sector. Changing customer requirements created an opportunity to step up to higher value cold forging products. But, as with any new process, the opportunity also came with costs in development.

“We were aware that there was the possibility of government support,” said Laura Woodruff, Balsam’s vice-president, “but we also believed that getting it was difficult and expensive. As it turned out, we didn’t need to do any extra work and we are getting substantial credits that really help to justify the cost of innovating.”

Not that getting the SR&ED tax credit is automatic. Expert help makes all the difference. Michael Horne, president of Horne & Associates Consulting, a Collingwood-based R&D program consultant that works with SR&ED applicants, has produced results for his clients.

“SR&ED is about much more than a tax refund,” he said. “The use of this program has changed the way my clients think about innovation, by fostering a proactive commitment to developing new processes and new products. As a result, they can kick-start growth that pays off to the bottom-line far beyond the SR&ED claim.”

Although ideally suited to manufacturing, Horne’s other successful SR&ED clients include service sector and distribution sector innovators. They also include a leading Ontario ski resort – where process efficiency and throughput (of skiers) are key drivers for competitive success. He can claim 100 per cent success for applications – which means that business owners get good advice before engaging the government.

Getting Around Barriers

In 2007, the Finance Department asked for industry comments on SR&ED structure and on current barriers to more active participation. It got an earful.

The terminology is perhaps the most obvious challenge. Requirements are stated as follows (with our plain language translation):

Stated Requirement

 “Qualified scientific, engineering or technology personnel must conduct a systematic investigation through experimentation.” 

Simple Translation

Your capable staff must plan and keep track of what they are doing.

Stated Requirement

“Work must generate information that advances the understanding of scientific relations or technologies” 

Simple Translation

You are finding new ways of doing things or adding new capabilities to your products or services.

Stated Requirement

“The possibility of achieving objectives must be unknown or indeterminable based on generally available scientific or technological knowledge”  

Simple Translation

You have investigated available solutions, but none exactly fit the problem or challenge.

The program description on the government website is fairly complex.

Like Balsam, most business owners are wary of engaging the taxman on their own in a highly technical application process where there is no guarantee of success and where the word “audit” pops up frequently.

So What Spending Qualifies?

The SR&ED categories include engineering, design, operations, analysis, computer programming, data collection, testing and even behavioral research. Just about everything done in the development lab or on the engineering desk could qualify. Other day-to-day activity can also count, for example:

• developing a custom product solution on the shop floor
• coming up with a new way of doing things to save money or to enter a new market
• field testing and trialing of customer solutions
• adapting standard software to better meet your needs
• developing unique ways to track and analyze information

When accounting for development expenditures, everything from employee or contractor time to scrap material and sample costs can count as part of the claim. And, good news, “audit” in this case means “review”—only of the costs related to the application. It’s usually quick and painless.

The real key is that the adaptation or improvement must come from new development activity. Buying a machine or installing an application doesn’t usually qualify on its own, because someone else created it. What you do with it is what’s unique to your business. So the competitive need to differentiate pays off twice – with innovative products or services and with a tax credit!

Balsam is now a fully committed SR&ED advocate. “We need to diversify beyond our core automotive customers and there is a constant cost-reduction challenge for export opportunities,” said Woodruff, “Ongoing innovation is a critical strategy and SR&ED gives us the confidence to commit new investment.”

Of course, there are forms to fill and a review process to go through. Fortunately, there are experienced consultants like Horne and Associates, who not only fully understand the process, but also deal with the government assessors. Michael Horne noted, “Particularly for first time applicants, our assistance gives an up-front assessment of expected benefits and speeds up the entire process.”

Your Potential SR&ED Credit

Canadian-Controlled Private Corporations (CCPC) get the best return, with a credit of up to 35 percent of development spending. These are Canadian-owned companies that are not listed on a public stock exchange. For these companies, which includes most independent small businesses, the program provides a refund of spending against taxes, or if no taxes are payable, a cash refund. Other Canadian corporations qualify at the 20 percent refund level. There may also be extra provincial credits.

For more information about this article, please contact:

Michael R. Horne, M.B.A., Hons. B.A.
Horne and Associates Consulting

This article was written by Ross Peacock.  Ross Peacock is a business writer and researcher. He was Associate-Director of Research at York University.  He now teaches marketing and business technology at Georgian College and Ryerson University. He can be reached at


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