Succeeding under the new SR&ED regime

Do changes to the SR&ED program make it more difficult to obtain funding for industrial research and development? We take a look at the revised criteria and its potential impact on your tax credits.

In many of my conversations involving SR&ED tax credits, I get questions regarding the eligibility rules that have evolved over recent years. In my view, there has been no fundamental change to the eligibility criteria. The original criteria of technological uncertainty, experimental development and technological advancement remain central to eligibility.

However, part of the criteria underwent refinement in the December 2012 release of CRA’s consolidated policy document. This document introduced two distinct sets of tests for experimental development, and also reiterated CRA’s expectation for contemporaneous evidence in support of experimental work performed. This led to a “new” five-point evaluation criteria, enumerated below, and taken verbatim from the CRA document:

1. Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?

2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?

3. Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?

4. Did the process result in a scientific or a technological advancement?

5. Was a record of the hypotheses tested and the results kept as the work progressed?

The tests implied by questions 2 and 3 are probably the most intimidating since most industrial R&D departments do not formally structure their experimental development with the formulation of a hypothesis. Such formalism exists primarily in research laboratories and academic research environments.

However, in our interviews with industrial R&D personnel we often discern fragments of information that can form the basis of a hypothesis. After all, a hypothesis is defined as: “A statement that explains or makes generalizations about a set of facts or principles, usually forming a basis for possible experiments to confirm its viability”. Many who engage in R&D work, intuitively begin with a set of assumptions that may pave the way towards resolving or understanding a problem. Thus, it is both possible and worthwhile to construct a formal hypothesis by intelligently dissecting the larger thought process.

Technical reports accompanying a claim should demonstrate the hypothesis guiding the experimental work. A good report will narrate the process in line with the sequence of activities imposed by the scientific method of; formulation, development, observation & testing. Each cycle should provide the feedback loop that informs the next formulation stage.With tests 2 and 3, the CRA is effectively attempting to exclude activities that lie outside of experimentation by scientific method. The intent is to exclude trial and error or successive iterations of a solution that are not guided by the scientific method. As an aside, it should be noted that for every formal hypothesis that is eliminated through the scientific method, the elimination of a hypothesis can be claimed as a technological advancement.

Test 5 is also relevant as it involves collecting evidence related to your hypothesis. Companies should treat the CRA as they would a client. Just as a client will not sign a check until all of a deliverable’s requirements are met, the CRA requires contemporaneous evidence before they “pay” the R&D expenditure.

Collecting all this relevant evidence without weighing down your development team with excessive record keeping can be a challenge. Here are some practices that require minimal time.

Keep track of technological uncertainties and obstacles with emails to internal staff or documentation in project management tools. This is a simple way to establish a basic timeline;

Since a timeline is insufficient for CRA purposes, support the above with other information records such as activity logs and time keeping;

Leverage software development tools, from issue tracking to source version control;

In non-IT environments, chronicle prototype development with photo, video or data capture. This evidence tends to be well received by the CRA.

In conclusion, companies involved in eligible SR&ED activities should heed the evidentiary demands of the CRA. They should also formulate their R&D narratives to align with the structure expected by CRA. The SR&ED program remains a thriving and valuable source of funding, and no company should forgo their rightful claim due to an inadequate presentation of the facts.

Author: Kegham Redjebian, Eng.

Kegham is an engineer with over twenty years in software development industry experience and over seven years as a consultant in SR&ED and related technology development tax incentives

Copyright – MNP.