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

And So… To Court

This article is by Bruce Madole who kindly agreed to provide some interesting materials related to SR&ED.


You are not legally required to produce detailed written records in support of a SR&ED claim.  However, if you don’t, you must be prepared to spend years before the courts in defense of your claim, and you must understand that you will most probably lose.  This sentence above is a loose paraphrase of the outcome of a Court decision (136736 Canada Inc. v. Her Majesty the Queen). I’ll write more about it later, another day.
To support a SR&ED claim, the tax authorities demand detailed, step-by-step records about the progress of the technical work.  They’re quite specific about what they want to see:  the technological uncertainty, barrier or gap, the hypothesis formed, the actions taken, and so on.  And then, eventually, they will want to see the documented linkages between those work steps that you documented, and the costs that you claimed. Needless to say, many if not most businesses fail to keep such levels of documentation, recorded in the way that the Canada Revenue Agency would like to see.
Anecdotally, some reviewers have been quite unreasonable or hard-line in their demands on these points, but it’s hardly surprising.  When they provide public training and information sessions for the SR&ED program, the CRA naturally insists on the need for detailed technical records, proof of experimental development, and proof of the associated costs. If you’re claiming it, they will demand evidence. No big surprise, this.
In fact, I’ve heard that increasingly, CRA reviewers are making the sufficiency of evidence their primary determining factor among the three key criteria, ruling out claims purely for failure to satisfy the requirements for evidence.
There have been a number of court cases along the way, in which the legal precedents have provided valuable guidance to the conduct of the SR&ED program.  Unsurprisingly, some of these cases have to do with the need for supporting evidence. (Well, probably all of them do, in one way or another.)
Three of the key cases are:
  • RIS Christie Ltd v. Canada (Federal Court of Canada, Appeals Div.)
  • CW Agencies Inc. v. Canada (Federal Court of Canada, Appeals Div.)
  • Northwest Hydraulic Consultants Ltd. and Her Majesty The Queen (Tax Court of Canada)


The judgments in these cases are available to be read, via the websites for the respective Courts, and all of them are worthy of detailed study.  Of particular note, however, is the fact that the Federal Court of Appeal, in the decision re: CW Agencies v. Canada [paragraph 17], echoes the decision of the Court (from RIS Christie Ltd v. Canada) in articulating five (5) criteria:

1.         Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
2.         Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
3.         Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses?
4.         Did the process result in a technological advancement?
5.         Was a detailed record of the hypotheses tested, and results kept as the work progressed?
[emphasis added]

What’s noteworthy about this, is that we have become so accustomed to talking about the three key criteria of SR&ED (Advancement, Uncertainty, Scientific or Technical Content (aka The Work Performed section) that we overlook the approach of the Courts, in which the Content section is broken down further into three distinct criteria, all having to do with: creation of hypotheses, the spirit of the scientific method, and the keeping of a detailed written history of the work – three out of five criteria, overall, have to do with the need for documentation and evidence.  (As an aside, perhaps we would do well to modify SR&ED training approaches that continue to speak of only three criteria?)
Detailed evidence of a systematic investigation is still preferred by CRA, and by the Courts. You may be able to defend your claims by pointing to the specific advancements achieved, or by producing oral testimony in support, but will most probably have to spend years in court to do so.  (Alright … maybe not years in court … but perhaps, years preparing for court, interviewing and preparing witnesses and experts, etc.  I’m exaggerating to make a point.)  You cannot achieve such results without going through lengthy processes for objection, administrative review, and legal actions, and so on. Lawyers are expensive.  (Don’t forget that, if you lose, you may end up paying for CRA’s legal costs as well as your own. And that’s gotta sting! ) Every year you spend fighting through this process is a year in which your claimed SR&ED benefits are not being received. Staff time is consumed in preparing for such proceedings.  The costs add up. But … why go through all that?
Wouldn’t it just be simpler – so much more incredibly simple  — to start keeping and maintaining the necessary technical and financial records, if you plan to claim SR&ED?
If you can’t produce evidence that will satisfy the CRA science reviewers, and financial reviewers, and if you keep insisting on your right to claim, then you will end up before the Courts. And when did you ever hear about a court case that did not demand the presentation and discussion of evidence?  If you’ve produced none, then that fact will become evidence… for the CRA.







Bruce Madole
Other articles by Bruce Madole in SRED Unlimited blog