Words
The CRA’s new guidelines on the eligibility of work for SR&ED tax incentives.
The CRA replaced its five questions with new guidelines. They come down to two words: why you did the work, and how you carried it out.
The substance has not changed: you need a real technological uncertainty, a systematic approach, and records kept as you go.
There are new guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. These guidelines replace the Eligibility of Work for SR&ED Investment Tax Credits Policy, which has been archived.
The definition of SR&ED given in subsection 248(1) of the Income Tax Act has not changed. The new guidelines feature simplified explanations of the program requirements, clear breakdowns of what constitutes eligible work, and links to further guidance on what you can claim and how to support your claim.
You can find the details here: guidelines on the eligibility of work for SR&ED tax incentives.
The definition describes why and how SR&ED is conducted — two key requirements that must both be met for work to be eligible as SR&ED.
The old policy and its five questions
If we look at the old policy, issued in 2014:
- Was there a scientific or a technological uncertainty?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
- Was a record of the hypotheses tested and the results kept as the work progressed?
The “why”
It covers questions 4 (advancements) and 1 (uncertainties). How can you determine when new scientific or technological knowledge is needed? It is needed when it is unknown — or uncertain — whether a given result or objective can be achieved, due to an insufficiency in the available scientific or technological knowledge. This is referred to as a scientific or technological uncertainty. Note that the available knowledge is the combined scientific or technological knowledge of the resources within your business and those sources that are reasonably available to you publicly.
The recognition that scientific or technological uncertainty exists marks the starting point for the SR&ED work, while the advancement is the targeted outcome of the work. Therefore, an attempt to resolve scientific or technological uncertainty is an attempt to achieve scientific or technological advancement.
The “how”
It covers questions 2 (hypotheses), 3 (systematic investigations) and 5 (records of the hypotheses). It is important to distinguish between a systematic approach to carrying out work and the approach that is a systematic investigation or search called for in the definition of SR&ED. The latter approach includes:
- Generating an idea consistent with known facts, which serves as a starting point for further investigation towards achieving your objective or resolving your problem. Your idea may be expressed as a possible solution to a problem, a proposed method, or an approach. This can be referred to as a hypothesis.
- Testing the idea or hypothesis by means of experiment or analysis. The idea can evolve and change as a result of testing.
- Developing logical conclusions based on the results or findings of the experiment or analysis.
- Keeping evidence that is generated as the work progresses.
Prior to 2014, the CRA considered the three classic criteria: technological uncertainties, systematic work, and technological advancements.