In continuation to our two articles published on the Medical Cannabis Industry, we continue to educate the medical cannabis industry about SR&ED eligible activities. Here we describe how some expenses can be converted from being not eligible to eligible for SR&ED.
The majority of expenses for companies in the cannabis industry (especially for new companies) is capital equipment. These expenses include the growth chambers, sensors, irrigation systems, lighting equipment, filters, grinders, extractors, analytical instruments and many others. In addition to equipment itself, there are associated expenses on subcontractors, who develop, install, and maintain.
Unfortunately, in 2014 CRA removed expenses on capital equipment from the list of eligible SR&ED credits. Nevertheless, some of these expenses may still be covered, if they are performed to support SR&ED. For example: a company installs a new lighting system – there can be two scenarios of work: one not eligible and one eligible for SR&ED. If the system is installed as part of the expansion of the company and/or as a preparation to start the growth process – then it will not be accepted as SR&ED eligible activity by CRA. However, if it is installed in parallel to a different existing system, and the company plans to compare the two systems in order to learn which one works better in terms of yield, potency or terpenes profile of the harvest – then the development and installation of such system is SR&ED eligible (excluding the equipment cost). As usual, the work should be documented in the time sheets of employees and/or in the invoices of contractors.
In general, the work undertaken during commercial production is not eligible for SR&ED. Nevertheless, if during the production the growers change parameters of the growth (e.g.,nutrients, lighting, humidity, etc.) then measure and analyze the effect of the change on the outcome (e.g., plant properties and yield), then the work of the grower is considered SR&ED.
In this case, it is important to perform a proper due diligence work assessment to be sure that the information which the company wants to learn by implementing those changes is not available in the open source. It is also important to separate the time the grower spends on changing parameters, collecting and analyzing the data from his routine activities. It can be done either by managing detailed time-sheets or by separating the work between several growers, when some do mostly routine work, and others deal exclusively with research in a given time period.
If the company receives government funding from other sources than SR&ED, and uses this cash flow for SR&ED work – it cannot be claimed, as it is “double dipping”. Therefore, when the company plans its budget, it is recommended to use the grant money on expenses which are not SR&ED eligible, like the ones described above. E.g., on construction, on capital equipment, maintenance and or on routine production work.
For further information on the Medical Cannabis Industry, please contact us today.
Senior Science Advisor
Mobile: +1 647.972.6285
900-2235 Sheppard Ave E
Toronto, ON M2J 5B5
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