5 Question Methodology to Determine SR&ED Eligibility
Many businesses complete R&D work regularly, but not all of it meets the requirements to take advantage of the Scientific Research and Experimental Development (SR&ED) tax incentive. The Canada Revenue Agency (CRA) lists the following 5 questions to determine if work is eligible:
1.) Was there a scientific or technological uncertainty that could not be clarified with current knowledge?
The world is constantly changing, meaning yesterday’s solutions often do not apply to today’s challenges. New, improved, or technologically advanced products, processes, and devices are necessary for the world to adapt.
However, current scientific and technological knowledge is not always sufficient to meet modern needs. If the work addresses these unfulfilled needs and uncertainties to develop solutions, it might be eligible for the SR&ED tax incentive.
2.) Were hypotheses developed specifically to reduce or eliminate that uncertainty?
The SR&ED project should be centered around the scientific or technological knowledge gap the researcher aims to fill. All research, testing, and other tasks involved in the work plan should be geared directly toward proving or disproving that hypothesis. When these two requirements are met, the work could be eligible for the SR&ED tax incentive.
3.) Did your approach meet the criteria of a systematic investigation or search through experiment or analysis?
Not all research and development qualify for the SR&ED tax incentive program. Work must revolve around systematic investigation or search, through experiment or analysis, to advance science or technology on a basic level.
To clarify, the CRA defines the systematic investigation or search process as:
- Defining the problem being addressed
- Creating a hypothesis surrounding new ideas for solutions and the focus of the research
- Testing a hypothesis through experiment or analysis
- Developing conclusions according to test results
4.) Was the result of the work an advance in science or technology?
To be considered as SR&ED eligible the work performed must lead to advancement. The breakthrough does not have to prove or disprove the hypothesis.
5.) Were good records kept of the process, from hypothesis to conclusion?
Record keeping is vital to conducting an SR&ED project. There must be formal reports to justify all necessary and related SR&ED expenditures. The paperwork must support the tax claim and the procedures carried out in the project.
The work must also fall into one of the following categories:
Basic research, also known as pure or fundamental research, is carried out to better understand a topic. There are no practical applications specified under the SR&ED basic research category, which is more geared toward an activity that expands knowledge on a topic. Though it can result in a solution, product, or service, there are no immediate commercial goals required.
Applied research is carried out to answer specific questions. The objective is to apply the results of the research to immediate commercial goals.
Experimental development is using information from current knowledge and practical experience as well as gaining discoveries. All of this is then put to work producing new or improved products, procedures, or services to achieve advances in technology.
Support work refers to tasks or projects that are necessary to complete research or development. These might include:
- Mathematical analysis
- Data collection
- Psychological research
- Computer programming
- Operation research
Support work can be carried out by the taxpayer, a contractor, or a designated third party.
For additional help with SR&ED eligibility and submitting claims, refer to our SR&ED overview resource here.
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