How the CRA Determines if Your Project Qualifies for SR&ED Tax Credits

The Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive program for Canadian controlled private corporations that perform scientific or technological research. SR&ED tax credits can be used to reduce the income tax payable for your company.

SR&ED Eligibility

When your company or your SR&ED consultant submits a SR&ED claim, then the Canada Revenue Agency (CRA) will determine if it is eligible based on three criteria:

• Technological Advancement: does the project further scientific or technological knowledge not readily available?
• Technological Uncertainty: are there technological challenges or scientific uncertainties which need to be solved?
• Technical content: did you form a hypothesis, and go through a logical, step-by-step process to overcome these challenges?

The CRA will determine if your projects meets these three criteria by providing answers to the following five questions:

“Was there a scientific or a technological technological uncertainty that could not be solved by standard practice / engineering?”

“Did the project involve formulating a hypothesis specifically aimed at reducing or eliminating that uncertainty?”

“Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?”

“Did the process result in a scientific or technological advancement?”

“Was a record of the hypothesis tested and results kept as the work progressed?”
If the answer is “yes” to the above questions, then the project qualifies as scientific research and development work and is eligible for an SR&ED tax credit.
Let’s explore each of these questions:

Scientific or technological uncertainty

If a problem can be solved using standard practice or readily available technology, then these are not qualifying expenditures for SR&ED tax incentives. However, if a solution is not readily available and your research project advances the current state of technology, then the project may be funded through SR&ED.

Hypothesis aimed at reducing or eliminating the uncertainty

A hypothesis is the starting point for your research. It is a proposed solution based on currently available knowledge and scientific information. In many cases this information is limited or incomplete. For your project to be approved for SR&ED tax credits you will need to identify how you will resolve the technological unknowns and prove the hypothesis, before you begin your research.

Use of the scientific method

The scientific method is the structured approach of formulating a hypothesis, identifying a step-by-step process to test that hypothesis, and modifying the hypothesis based on the test results. The end result of the process should be either that you have proven the hypothesis, or that you have proven that it can’t be achieved.

Scientific or technological advancement

Your project is eligible for SR&ED tax credits if it enhances the current state of technology or extends a capability. If you have found an existing technical solution for the problem addressed in your project, then it most likely won’t qualify.Canada Revenue Agency typically approves projects that have an unknown outcome, where the applicant is taking risk of failure if a solution is not found. It’s experimental, identifies new concepts, seeks new knowledge, and solves unusual problems. Eligible SR&ED work brings new knowledge across several other areas and competitors will also benefit if given this new knowledge.Projects that start with a predictable or unexplored outcome are generally not accepted for SR&ED tax credits. Systematic methods such as troubleshooting, trial and error, and optimization are involved, however not experimental. This approach often solves typical or routine problems by using existing knowledge with little or no new leverage. A competitor will not benefit from such a project.Sometimes projects fail to achieve the technological objective, for example when it turns out to be impossible to overcome a particular technical challenge. Such a project may still qualify for SR&ED tax credits because it has improved technical knowledge in that area.

Testing of the hypothesis and record keeping

Documentation of the actual work done to test the hypothesis is required throughout the experimentation process and must be done at the time the work was done. Throughout the project you should be keeping records about the work you do and how it is relevant to the project as a whole. This means record-keeping and identifying why each major element is relevant and how it relates to the project as a whole.
Notebooks, diaries, test results, emails, minutes, and file notes are all examples of proper documentation. Another significant part of record-keeping is time tracking. This proves that the work has been completed and provides the Canada Revenue Agency with proof of time logs for subcontractors and employees throughout the project.