TABLE OF CONTENTS
I. SUMMARY
II. INTRODUCTION
III. SCOPE
IV. SR&ED PROJECT REQUIREMENTS
V. R & D IN THE FOOD & CONSUMER PACKAGED GOODS INDUSTRY
VI. SR&ED PROJECT COMPLETION
VII.CLAIM SUBSTANTIATION
This paper describes the elements of a SR&ED project as conducted by the Food and Consumer Packaged Goods Industry. It discusses the definition of a SR&ED project and emphasizes the importance of the three criteria, Scientific or Technological Advancement, Scientific or Technological Uncertainty and Scientific and Technical Content. Individual claims must identify the scientific or technological uncertainty and scientific or technological advancement sought using a systematic approach in the SR&ED project. The paper attempts to clarify the difference between what projects may be considered standard practice and routine development, and SR&ED. It recognizes that these differences are not always clear-cut, and scientific and technical judgment may often be necessary. Characteristics of the research and development projects carried out by the industry are outlined and terminology used by the industry is employed. The role of consumer testing when conducted scientifically and its relevance as an analytical tool in food and consumer packaged goods research is described. The project activities and reasons behind conducting scale-up and plant trials are explained and the requirement for evidence to substantiate project claims is noted. The paper attempts to clarify SR&ED in this industry from a practical viewpoint and describes the methods by which these activities are accomplished.
The Food & Consumer Packaged Goods industry is composed of small, medium and large manufacturers that sell packaged products through retail grocery, drug, convenience, mass merchandise and foodservice distribution channels. These packaged products are characterized as those that are purchased or are fast consumed and replaced frequently. Scientists, technologists and process engineers have the responsibility and the challenge of developing a wide variety of food, beverage and consumer products and processes to satisfy continuously changing consumer expectations and improve productivity in a competitive global economy.
This paper concentrates on the characterization of Scientific Research and Experimental Development (SR&ED) as described in sub-section 248(1) of the Income Tax Act. SR&ED as defined in this Act includes each of basic research, applied research and experimental development. It also includes work with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research, where such work is commensurate with and in support of basic research, applied research or experimental development.
This paper will serve as a tool for companies wishing to participate in this incentive program and for the SR&ED Technical Reviewers to understand the R&D practices in this industry.
IV. SR&ED Project Requirements
SR&ED claims must demonstrate the inclusion of each of the following three criteria which are outlined in detail in IC86-4R3 dated May 24th, 1994 and are as follows:
These three criteria apply equally to SR&ED projects in Product Development, Process Development, Packaging Development and Equipment Development.
Scientific or Technological Advancement: The scientific research and/or experimental development project must generate information that advances the company's understanding in an area of science or technology. This means that when developing any new or improved product or process a scientific or technological advancement must be sought in order for the project to be SR&ED.
Knowledge: The knowledge and resources available to companies will vary. What is scientifically or technologically uncertain to one company may be standard practice or routine to another. The objective of this incentive program is not to duplicate knowledge that is accessible to the claimant. If, however, this knowledge is not generally available, a SR&ED project may be required. This may be the case when a company is developing a new product or process in which the technology may be available on a proprietary basis elsewhere. Similarly, small companies with limited technical resources may not be aware of information that may be readily accessible to larger more technologically advanced companies. The test of this knowledge base may differ for each company and each claim should be judged on a case-by-case basis.
Scientific or Technological Uncertainty: Scientific or technological uncertainty is determined when it is not known by the claimant whether a given result can be achieved or what methods are required to achieve the result. It occurs when the current state of knowledge available to the company is insufficient to achieve the desired technical objective. Scientific or technological uncertainty can be identified at the onset of an R&D project or it may occur during the course of a project that was initially considered to be achievable using known technologies. Resolution of the scientific or technological uncertainty provides the claimant with information that is new and may result in achieving the desired technical objective.
Standard Practice: Scientific or technological uncertainty may apply equally to new or existing products or processes. In conducting product or process development, some standard practice can be used to achieve the project goals. This routine development work may not be eligible as anyone trained or experienced in the science or technology in this industry may have the knowledge required to achieve the result. However, in conducting what may be considered routine development or standard practice, problems may arise that were unanticipated and are not readily overcome by the scientific or technological knowledge available to the company. In other words, standard practice does not satisfy the project objectives and a scientific or technological uncertainty exists.
System Uncertainty: System uncertainty exists when work on integration and/or modification of standard technologies in product or process development introduces a clear element of technological uncertainty. System uncertainty can be demonstrated when numerous known variables in the technology or system under development are known to interact in some way, and the nature of these interactions cannot be predicted by applying existing models or knowledge. The key factor is recognition that the combination of various technologies, which by themselves may be established practices, in combination may result in SR&ED.
Cost Constraints: In this industry, it may be readily known how to achieve a given technical objective when cost targets are not considered. However, when a commercial cost target is required, the state of knowledge may be insufficient to achieve the desired objective. A scientific or technological uncertainty may thus arise that is imposed by economic considerations. SR&ED should be based solely on resolving the technological challenges imposed by cost constraints. The overall business or commercial viability of the product or process is not relevant in determining whether or not the project is SR&ED.
Scientific and Technical Content: The SR&ED project represents a systematic investigation by qualified personnel, proceeding from the formulation of a hypothesis, through testing by experimentation or analysis to a logical conclusion based on the information or data obtained. The project activity may result in the development of prototypes or models, which test the technical feasibility of the project or idea and provide guidance to achieving the final goal. The need for a systematic program of investigation does not preclude ideas that result from intuitive processes. Such ideas and hypotheses must still be tested through a systematic program of investigation in order for them to be SR & ED. Therefore SR&ED project objectives must be clearly stated at an early stage in the project's evolution and experimental methods, by which the scientific or technical uncertainty is resolved, are planned and based on the technological knowledge available.
V. R & D in the Food & Consumer Packaged Goods Industry
In claiming SR&ED tax credit, projects involving basic research, applied research, or experimental development qualify if they meet the three criteria as described above.
The Research and Development process normally includes some or all of the following types of activities, projects or programs: new product, packages and/or process development, technical procedure development, product improvement, technology advancement, productivity improvement and product line extension. The activities relating to line extension, productivity improvement, and product, package and/or process improvement may involve a wide variety of formulation alterations, manufacturing modifications, and ingredient substitution and may include considerations for packaging and equipment design changes. These activities may sometimes be achieved by standard practice, but may also involve technological uncertainty leading to technological advancement. In all cases, the key consideration in determining whether a project qualifies, is the fulfillment of the three criteria.
The scope of a project must be specifically defined and aimed at resolving technological uncertainty and seeking technological advancement. Projects should be assessed in their entirety rather than broken up into their constituent parts to determine if they qualify as SR&ED. Projects should be identified at the highest level as long as the effort captured by the project is commensurate with the work required to meet the three criteria. Projects can be classified into two types:
The duration of a specific project is not a factor in determining its compliance with the definition of SR&ED. Some projects could extend over several years, while others may be short but still address scientific or technological uncertainty and the knowledge gained from these projects may be of great value. From a commercial perspective, ultimate success or failure either in market performance or in achieving business objectives is irrelevant in determining if a project meets the SR&ED definition.
As a result of new technology emerging from the supply base and continuous domestic and international competitive pressures to deliver the right product at the right price, food and packaged consumer products companies are continually re-assessing their product formulations, processes, packaging materials and systems to improve product performance and enhance overall efficiencies. The work required in achieving these changes in product or process technology in complex systems will often qualify as SR&ED.
Formula Ingredient, Manufacturing Specifications (F.I.M.S.):
The science and technology involved in the development of product formulations and manufacturing process specifications usually requires SR&ED. Science and Technology as practiced by the industry, refers to the development of products and processes that meet consumer needs and are designed to extend shelf life and survive the transportation and distribution conditions that are experienced as foods and other consumer packaged goods are marketed and sold throughout worldwide geographical locations and temperature zones. Product stability, consistency in quality, flavor, texture, form, extended shelf life and safety are some of the key attributes which this industry designs into its products. This is accomplished by developing specifications for formulations and manufacturing parameters. (F.I.M.S. is the terminology used to describe this activity).
Extensive experimentation and testing is often required to establish F.I.M.S. and critical process control points. Such experimentation is necessary to establish product consistency, product quality, process control procedures, regulatory compliance data and the development of final formulations and specifications. In cases where such work involves a SR&ED project, those activities that directly contribute to the resolution of the technological uncertainties, qualify as SR&ED support activities. Accordingly, the maintenance of records or other suitable evidence to establish this linkage is necessary.
Materials used by the food and consumer packaged goods industry in its wide range of products are primarily derived from agricultural or chemical sources which tend to exhibit chemical and physical variability. In the case of those materials derived from agricultural sources, this variability is largely caused by factors such as time of harvest, change in species variety, growing location and conditions, seasonal climatic variation, water availability, stress factors etc. In the case of other materials used for foods and consumer packaged goods (including preservatives, flavors, binders, fragrances etc., manufacturing or other source-specific factors may introduce differing degrees of material variability. Typically using standard practice based on pure model systems, the interaction of these raw materials with other ingredients, when processed, may produce the expected results. This would not be SR&ED. However, due to the inherent variability of a wide variety of the materials used in producing food and consumer packaged goods, unanticipated and unacceptable results can occur, creating technological challenges that cannot be resolved using standard practice or knowledge available to the claimant. This may result in the performance of a SR&ED project to resolve the scientific and technological uncertainties encountered.
Consumer Research:
Scientifically designed consumer testing conducted by qualified personnel is an integral part of food science and technology and consumer science and technology development programs. Courses on this technology have become a part of university curricula. Over the past three decades, this technology has emerged as a key analytical tool. In this industry, consumer testing is used to determine success against meeting technological objectives of SR&ED projects. Consumer testing becomes eligible when it is used as an analytical tool in support of a SR&ED project.
The science of consumer testing involves the use of sensory evaluation techniques, which have been researched and documented by scientists. Sensory evaluation is defined as the scientific discipline used to evoke, measure, analyze and interpret reactions to characteristics of food and consumer products as perceived through the senses of smell, sight, taste, touch and hearing. These techniques are quantifiable and have been correlated to instrumental analytical measurements e.g. rheological measurements, HPLC, NMR, NIR, texture analysis etc. Sensory characteristics of these products are considered as important as chemical, nutritional, physical or microbiological characteristics. The term "organoleptic properties" is sometimes used to describe the sensory characteristics of these products.
The measure used by industry as the basis for technical decisions on product performance is consumer acceptance as expressed in consumer test results. This interaction with the consumer is used to better define the product's technological specifications and to better orient the projects scientific research and experimental development activities. Consumer testing is also required to validate the project's technological objectives. This is similar to clinical studies done to assess the nutritional effect of foods on consumer health e.g. cholesterol lowering, diabetes management, weight control, or clinical trials performed to assess the efficacy of drugs on consumer health status.
Consumers have unique and individual perceptions of the overall quality provided by the complex combination of ingredients/attributes that constitute a food or consumer packaged goods product. There is an intimate level of human interaction with food and consumer packaged goods products from baby food, snacks, beverages, main meals, shampoo, toothpaste, cosmetics, soaps etc. Therefore it is impractical to predict consumer reaction to a given prototype, based solely on meeting certain chemical or physical criteria that have been achieved scientifically. Industrial scientists cannot rely on data from laboratory analysis to predict consumer acceptance, hence consumer testing has emerged as a valid analytical tool used in support of R&D projects.
Therefore consumer testing is eligible when used in support of a SR&ED project. The testing instrument may be trained sensory panels, employees, consumers and users. "In-home testing" with consumers and "in-situ testing" in the field are tools used in the industry to define and validate a project's technological requirements. Industrial scientists located in R&D, Q.C. or other technical support functions within the company or contractor may perform work in this field. The location of the activity is not critical in determining its applicability. When this research is conducted, individuals knowledgeable in this field develop the testing methods. The data obtained from these tests are used by scientists to assess progress against technological objectives and to overcome technical problems in meeting the project goals. As stated in IC 86-4R3, "In both regulated and non-regulated industries, technological specifications are determined by commercial objectives and by end-user requirements. It is necessary to define these requirements and to devise corresponding internal technological specifications. It is appropriate that work on defining such technological specifications be eligible, so long as these specifications have contributed directly to the characterization of the technological objectives of a scientific research and experimental development project that is under way."
Sensory Evaluation and Consumer Tests are eligible when the information obtained from these tests is used in support of a SR&ED project.
Work that consists solely of product concept development, product marketing, advertising positioning or brand positioning would not be viewed as SR&ED. Market Research testing related to concept development, consumer gap analysis, or attitude and usage data would not meet the definition of SR&ED. IC 86-4R3 defines market research as including "(but not exclusively) surveys to determine consumer attitudes to existing products or to possible new products. The research, for example, examines such factors as buying habits, use of leisure time, consumer needs or wants, and attitudes towards existing products and new products being tested". Similarly IC 86-4R3 characterizes market demonstrations or customer acceptance as those activities that "do not include interaction with the customer to better define the product's technological specifications and thus to better orient the projects scientific research and experimental development activities".
Sensory & Consumer Research testing as part of SR&ED activity:
The following types of testing involving sensory testing are often utilized to evaluate experimental products during the experimental development process:
Consumer Research testing that is NOT part of SR&ED activity:
The following types of consumer research are often conducted to obtain information to assist in making marketing or business decisions about a product:
Scale-up and Commercialization:
The progression of SR&ED from initial technological efforts at the bench level to a final commercial product or package requires the ability to prove that the initial SR&ED results can work on a larger process scale. In the food and consumer products industry, the normal approach is through an intermediate "scale-up process" in a pilot plant facility. Some companies may lack pilot plant facilities, or in some cases, the nature of their business dictates that experimentation needs to be conducted on a plant scale. Plant trials to resolve a scientific or technological uncertainty leading to technological advancement would meet the definition of a SR&ED project.
As a project moves through various phases of development, frequent trials on a larger scale will be required. These experimental trials are often a critical part of a SR&ED project.
SR&ED projects may be carried out using equipment of any appropriate scale. Pilot facilities for some established major corporations may be larger than the production facilities for a smaller company. The important consideration in all situations is the actual use made of the pilot facilities. They must be used for SR&ED projects that lead to technological advancement for the company.
Pilot scale SR&ED projects may be carried out at an existing dedicated pilot plant in an existing manufacturing facility, or in facilities contracted from a third party (e.g. private sector, university or government) where such contract costs may represent qualifying SR&ED expenditures. Appropriate cost accounting must be carried out in the latter situation to identify the SR&ED expenditures.
When new projects move from the status of experimental development to commercial production, it is sometimes difficult to determine when studies to resolve technological uncertainty have been completed. The SR&ED project is complete either when the technological advancement has been demonstrated to be achieved consistently under appropriate conditions (in most cases, this is achieved under plant operating conditions) and the associated technological uncertainty has been resolved. However, when unexpected technological problems arise during the start-up phase of commercial production or after commencement of commercial production, it is sometimes necessary for the company's research personnel to be involved in the resolution of technological problems during the transition phase or post-production phase. Resolution of these technological problems, when the three criteria for SR&ED are met, should be treated and documented as separate projects, but included in the resolution of the project objectives. Costs associated with commercial production are not included at this stage.
The creation and maintenance of project evidence allows for the timely and expeditious review of SR&ED claims. Evidence is required to establish the technical content of a SR&ED project. When claiming for SR&ED, it is important that the company maintain dated documents of the scientific or technological goals of the project, the progress of the work, how it has been carried out and the project conclusions. For long-term projects, this information provides a year-to-year record of progress against objectives.
The claims substantiation process can be simplified if proper documentation is retained for each project. The type of documentation will vary by project. As well, companies differ in the types of documents they maintain. As a guide, the following lists examples of types of documents that would be helpful to retain for the projects being claimed. It should be noted that not all these documents are required to substantiate a claim.