The Scientific Research & Experimental Development Tax Credit program is an excellent way to recover costs but the first question you should think about is if you are eligible for this program.
In this post, we will share the three three main criteria for claiming SR&ED, the work that qualifies for SR&ED, five questions that the CRA uses to determine whether your project qualifies or not, as well as a checklist for your SR&ED Claim.
Three Criteria to Qualify for SR&ED
To qualify for SR&ED, your project has to fulfill these three criteria: Technological Advancement, Technological Uncertainty, and Technical Content.
For your project to fullfil this criteria. the search carried out in your experimental development activity must generate information that advances your understanding of underlying technologies. In a business context, this means that when a new or improved
material, device, product or process is created, it must embody a technological advancement in order to be eligible. In other words the work must attempt to increase the technology base or level from where it was at the beginning of the Project.
Technological uncertainties are the technological problems or unknowns that cannot be overcome by applying the techniques, procedures and data that are generally accessible to competent professionals in the field.
To be eligible, the project must have been conducted in an iterative or systematic process. A typical process involves identifying the unknowns or challenges; forming a hypothesis about how to solve those challenges; testing and experimentation; analysis of process to reach your conclusion.
In a business context, this requires the objectives of your project to be clearly stated at an early stage and the method of addressing the unknown must be clearly set out. For technical agencies whether development agencies or even Instagram marketing agencies, this can make a significant difference.
In other words, work that qualifies for SR&ED tax credits can be:
- Experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
- Applied research to advance scientific knowledge with a specific practical application in view;
- Basic research to advance scientific knowledge without a specific practical application in view; and
- Support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, but only if the work is commensurate with, and directly supports, the eligible experimental development, or applied or basic research.
Five Questions the CRA Uses to Determine What Qualifies for SR&ED
To evaluate if your project qualifies for SR&ED, the CRA typically ask the following 5 questions:
1. “Was there a scientific or a technological uncertainty that could not be removed by standard practice/engineering?”
This means that you have advanced the current state of technology by enhancing a characteristic or extending a capability. An example could be an automobile parts manufacturer who does not yet have the technology to increase volume in order to meet customer demands. The manufacturer will have to do some development and research to advance the technology and will be able to claim that time through the SR&ED program.
2. “Did the effort involve formulating a hypothesis specifically aimed at reducing or eliminating the uncertainty?”
A hypothesis is defined as “a proposed explanation made on the basis of limited evidence as a starting point for further investigation.” For the purposes of SR&ED, a hypothesis is simply referring to how you will attempt to resolve example, an automobile parts manufacturer could have discovered a new way of advancing technology through analyzing several prototypes and continually testing the original hypothesis.
3. “Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?”
The CRA is trying to understand whether you went through a well thought out process to identify the advancement you needed to achieve; you identified challenges that were associated with achieving that advancement; and that you followed through in an iterative process until you arrived at your hypothetical outcome or proved that it could not be achieved.
4. “Did the process result in a scientific or technological advancement?”
You have advanced the current state of technology by enhancing a characteristic or extending a capability. In your research and experimentation efforts, did you find an existing solution that solved your challenges? If that is the case, then your project most likely does not qualify for SR&ED.
The CRA is looking for the result of your iterative process and how that has advanced the knowledge base within your company. Keep in mind that this advancement needs to be on a technical level and not a business one. It cannot just address a ‘market demand’ knowledge gap, but a technical one.
Didn’t achieve your technological objective due to challenges you could not overcome? This can qualify for SR&ED as this failure has advanced your technical knowledge and you know where not to start in your next iteration of your testing.
5. “Was a record of the hypothesis tested and results kept as the work progressed?
Documentation needs to be contemporaneous. This means that it was “created at the time when the SR&ED work was done and produced as a result of performing such work.” It is expected that all work is documented. You must clearly demonstrate why each major element is required and how each fits into the project.
1. Is your R&D project eligible?
Did you fulfill the three criteria for the R&D tax credit – technological advancement, technological uncertainty, and technical content?
2. What kind of company are you?
- Are you a corporation? Or a different type of entity?
- Are you Canadian-controlled? Or foreign-owned?
- Are you privately-owned? Or public?
- Are you considered an SME within CRA’s definition?
The reason we ask, is because there are different return rates depending on what type and size of company you are as well as whether you’re Canadian-controlled or not.
3. What uncertainties have you overcome?
The following are the three questions taken directly from Form T661 that your SR&ED advisor will help you address
- What scientific or technological uncertainties did you attempt to overcome uncertainties that could not be removed using standard practice?
- What work did you perform in the tax year to overcome the scientific or technological uncertainties described above?
- What scientific or technological advancements did you achieve as a result of the work described?
4. What have you documented to support your claim?
Start gathering all of your materials. Can you confirm that your documentation is:
- Contemporaneous? It was documented at the time the SR&ED work was done.
- Dated? It proves that the work occurred in the fiscal year you are claiming.
- Highlights technical challenges? It supports the technical reports that will be submitted with the claim.
5. What counts as proper documentation?
- Version control for all technical documents
- Prototypes, including software and physical products
- Test documents
- Developer or Engineering Notebooks
- Meeting minutes
- Whiteboard photos
6. When is your fiscal year end?
You must file your claim within 18 months of your fiscal year end. However, if you file within 6 months, it is considered a current claim and you can receive your return within 68 days, on average.
7. Who is your SR&ED advisor?
To save time and effort, find an advisor who has a history of filing SR&ED claims, defending CRA Reviews, an ongoing relationship with the CRA, as well as someone who completely understands your company. At Boast.AI, our team of engineers and finance professionals armed with over 20 years of experience in this field has extensive knowledge about the SR&ED program. We can translate your work into a format understood by the CRA and are able to prepare the claim with minimal time commitment from you. Get in touch with us if you would like to work with the best team – one that is highly reputable, efficient, technology-focused, and well-connected!