This article is by Bruce Madole who kindly agreed to provide some interesting materials related to SR&ED.
of this article talked about some of the extra nuances and baggage that
the Canada Revenue Agency (CRA) has recently begun adding to terminology
that we use in the assessment and preparation of SR&ED claims,
along with some of the implications (reduced claims). In this part, I’m
going to examine one of the CRA’s favourite policy documents to
highlight and discuss some of the current differences.
The Information Circular IC86-4R3 Scientific Research and
Experimental Development was published May 24, 1994 (approximately 17
years ago), and has served as CRA’s main reference document for
SR&ED ever since, even among the proliferation of additional policy
and application documents, and sometimes, it appeared, preferred over
referencing the income tax act itself.
Bear with me as I’m going to quote a couple of sections from IC
86-4R3. The definition of scientific or technological uncertainty as
described in Section 2.10.2 (bolding/underlining is mine):
2.10.2 The criterion of scientific or technological uncertainty is as follows:
• Whether or not a given result or objective can be achieved,
and/or how to achieve it, is not known or determined on the basis of
generally available scientific or technological knowledge or experience.
This criterion implies that we cannot know the outcome of a project, or
the route by which it will be carried out without removing the
technological or scientific uncertainty through a program of scientific
research or experimental development. Specifically, scientific or
technological uncertainty may occur in either of two ways:
- it may be uncertain whether the goals can be achieved at all; or
the taxpayer may be fairly confident that the goals can be achieved,
but may be uncertain which of several alternatives (i.e., paths, routes,
approaches, equipment configurations, system architectures, circuit
techniques, etc.) will either work at all, or be feasible to meet the
desired specifications or cost targets, or both of these.
• The scientific or technological uncertainty, rather than the
economic or financial risk, is important in characterizing scientific
research and experimental development -- and, hence, eligible
• Sometimes there is little doubt that a product or process can be
produced to meet technological objectives when cost targets are no
object. In commercial reality, however, a reasonable cost target is
always an objective, and attempting to achieve a particular cost target
can at times create a technological challenge which needs to be
resolved. A technological uncertainty may thus arise that is imposed by
economic considerations. Otherwise, the more general question of the
commercial viability of the product or process is not relevant to
whether or not a technological uncertainty is present and, hence, to
whether a project is eligible or ineligible.
• This criterion applies equally to work on new or existing
processes or products. The description of technological uncertainty
contained in this subsection applies wherever the text of this circular
refers to the criterion.
And later in the same document:
2.11 Application of criteria
The three criteria of IC 86-4R3 must be applied within the context of the taxpayer's business environment.
Scientific research and experimental development varies in content as
well as in the complexity of the technology in a given field. The
technical uncertainties encountered by one taxpayer may well be looked
upon as facts easily obtained by another. The judgment as to eligibility
should be made within the context and environment of a single company
and its field of business. Specifically, the activities undertaken to
resolve technical uncertainties are eligible if the taxpayer cannot
obtain the solutions through commonly available sources of knowledge and
experience in the business context of the firm. We expect that any firm
claiming expenditures for scientific research and experimental
development activities will have or will access the expertise necessary
to carry out a viable program.
These sections contain a number of wordings or approaches that are quite foreign to the CRA’s current message.
Variance 1 – Uncertainty as Doubt. The notions of
uncertainty expressed as to overall approach (Uncertainty Whether), or a
doubt about potential success, or as to which of several approaches is
best used, as in, “we didn’t know if this approach would work.” (Call
this one: Uncertainty Which.) This allows considerably more latitude
than the current definition (Uncertainty How) which expects the problem
to be already clearly understood and the technology gap or barrier to be
already precisely defined, thus leaving a lot of early exploratory work
off the table.
Variance 2 – Uncertainty re Approach. Uncertainty
whether a thing can be achieved, or uncertainty about which is the best
of several alternatives, are both materially more inclusive, from an
eligibility perspective, than uncertainty about how to overcome a more
narrowly defined and specified problem. Of these two variants
(uncertainty whether, uncertainty which), it is the uncertainty whether,
which I have also described as “uncertainty as doubt”, that is more
inclusive and allows greater scope for eligible activity. However, the
uncertainty about which approach is best applies even in situations
where CRA is insisting on it’s current, narrower definition – once the
problem is totally and clearly defined and understood, there would still
be a need to consider multiple experimental approaches. Otherwise,
there would be no experimental development. But this uncertainty, when
linked with the first, enables the claimant to include a whole range of
explorative and analytical activity previously used to help in
understanding and clarifying the nature of the technology barrier or
gap. This is work which, even if experimental in its nature, the CRA
would currently seek to exclude, because the technology barrier or gap
had not yet been narrowed to a single, clearly focused problem.
Other articles by Bruce Madole in SRED Unlimited blog
Dealing with technology? You might be eligible for government funding
SR&ED (Scientific Research & Experimental Development) is an incentive program by the Canadian government that refunds companies involved in Research and Development (R&D). (See the information about the program on the CRA website.) Canadian companies that spend money on creating or modifying products or processes through experimenting are eligible for SR&ED. Any company that deals with technology (software and hardware development, machinery, printing etc.) may qualify. If you created an entirely new industrial process or improved an existing one, if you took a database driver and rewrote it so its performance doubled, if you came up with a fuzzy logic algorithm to facilitate scheduling - all of this may be eligible. Innovation, uncertainties you overcame, and technological advancement are the criteria for eligibility. Even failed experiments may qualify. Non-Canadian owned companies also qualify, if they pay salary in Canada.
The SR&ED program is available to companies involved in Research and Development (R&D). Eligible expenditures include your time, employee and subcontractors labour, materials and equipment. SR&ED money is given as a refund for work already done.Read more about SRED