SR&ED Documentation for Software Development Projects

The costs associated with Scientific Research and Experimental Development (SR&ED) projects can interfere with your company’s success. However, with the assistance of the SR&ED Program, Canadian software developers can fund up to 64% of their Research and Development through the federal government. While this might sound too good to be true, the government is anxious to support technology development projects in Canada to help attract and keep technology talent in the country.
To qualify for the tax credit, companies must show their work attempts technological advancement and overcomes technological uncertainties through systematic investigation by qualified individuals. Understanding how to prepare documentation to prove you qualify can be difficult, but well worth the effort to access the funding.

Documentation for Technological Advancement

The biggest challenge companies face when applying for SR&ED tax credits is completing the CRA SR&ED forms. As a software company, you must specify your field of research for “technological advancement” as it relates to computer sciences; software engineering, and/or information technology. When you specify the category the CRA can better determine who has the appropriate technical background to review your claim. That’s why choosing the right category is important.Your job is to explain the current methods and processes used in your line of research and what you are doing that goes beyond these standard methods. The CRA is looking for the steps you took to find out if there’s an existing solution or method, and the shortcomings you discovered for that method. In order to establish your research process, providing details of the steps you took should include:

• A list of internet research, the relevant articles you identified and the shortcomings they benchmarked.
• Patent searches for existing software to share with the CRA.
• Researching competitors’ methods.
• Queries to experts for additional guidance on whether there’s a readily available solution

When you can provide documentation showing the research you conducted, the CRA reviewer can more easily confirm your efforts and in turn your eligibility.

Documentation Of Technological Uncertainties

You can show technological uncertainty by either proving:

• Scientific uncertainty, where the person is unsure whether the goals can be achieved at all because of scientific unknowns, OR
• System uncertainty, where you are fairly confident the goals can be achieved, but you are unsure about paths, approaches, equipment configurations, system architectures, circuit techniques etc. required to meet desired specs, cost targets, or both.

System uncertainty is by far the most popular choice as it involves experimenting with different methods to optimize a product or process. In order to prove this, you first select three or four key “technology uncertainty variables” that an expert research team can identify. With this list, you then can show what was done that sheds light on one of the variables in question. These would be the ones eligible for the tax credit.The process looks at results and conclusions from research with emphasis on conclusions. This is viewed as more important because it shows what you know now that you didn’t know when you started. When you can show this is the case, you are more likely to have an eligible claim.

Documentation Of Systematic Investigation

When it comes to systematic investigation there are three ways in which this can be accomplished:

Forming a Hypothesis: Designed to resolve the scientific or technological uncertainty is an essential step and requires observing and understanding the subject matter of the problem. Here, “hypothesis” means an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea. The meaning of the term hypothesis is applied in the most general sense and is sufficiently broad to apply to an industrial context as well.

Test the hypotheses by means of experiment or analysis: the method of experimentation or analysis by which the scientific or technological uncertainties are to be addressed must be clearly set out. Finally, the results of the SR&ED efforts that follow have to be properly identified. Often, this is an iterative process as new uncertainties are recognized and new or modified hypotheses are developed and tested based on the results of the prior iteration.

Document the Results: A record of the hypotheses, tests and results should be kept as the work progresses. It is expected that the work be recorded, clearly showing why each major element is required and how each fits into the project as a whole. It is also expected that the indicators or measures that will be used to determine if the goals of the work are met will be identified and recorded at an early stage of the work.
The more evidence you can present that you pursued research beyond standard practices, the more persuasive your claim. Therefore, archiving everything related to your investigation becomes crucial when pursuing a SR&ED claim.

Conclusion

Creating and maintaining solid documentation is crucial for companies who wish to receive up to 64% of qualifying Software Development expenditures through the SR&ED Program. Your records provide the information required to pass the scrutiny of your CRA reviewer. Your best bet is to work with an experienced SR&ED consultant to guide you through the process of collecting all information and preparing the documentation. With the right documentation available you will increase your chances of getting your SR&ED tax credit application approved!