It has been more difficult for the textile and apparel sector to claim Scientific Research and Experimental Development (SR&ED) tax credits due to the nature of the industry and tracking the eligible activities in a manufacturing context.
In 2004 – 2006 there was a seminar given by the CRA that was specific to the textile and apparel industry to assist taxpayers with carving out the SR&ED cost from trials conducted on production equipment and to help understand the types of projects that were eligible for the program. In 2011, SR&ED projects were being rejected that previously had been eligible for SR&ED funding and there was a mindset amongst some auditors that there was no eligibility for textile projects in garment manufacturing and fabric development.
Many companies closed during that time due to the strength of the Canadian dollar, importation and tariff factors increasing competitiveness and driving the cost of goods down, combined with the lack of support for innovation in the sector. As a consequence, goods began to be manufactured offshore with mixed results in terms of quality, and it was harder to claim R&D in the textile sector with the offshore costs ineligible for SR&ED tax credits. The number of SR&ED claims from the textile and apparel industries dropped as they were not accepted or because business owners did not want to go through time-consuming audits.
The recent changes in 2021 to the description of SRED eligibility is broader in scope although the details of the program have not changed. Essentially, the project eligibility for SR&ED is based on the Why and the How requirements. The “Why” for the work conducted must be for technological advancement and go beyond the company’s existing knowledge base to resolve a significant technological or scientific uncertainty. The “How” describes the systematic investigation or analysis with iterative trials, well supported by documentation. With the complexity of advanced electronic machinery for knitting and weaving, yarns and fabrics with specific functional properties and the rise of eco-friendly materials, there are many technological challenges in yarn spinning, garment manufacturing and fabric development. Increasing sustainability by using “greener” manufacturing practices or renewable plant materials are also generating unique challenges that require experimentation and analysis to achieve viable processes and textiles.
The textile and apparel manufacturing sectors are innovative and creating new products, materials and processes that advance technological or scientific know how. Canadian textile companies engaged in technology advancement are entitled to claim their eligible work and receive the tax incentive benefits provided by the SR&ED program.
Written by Anita Mac Eachern
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