SR&ED Project Eligibility
SR&ED eligible work is defined for income tax purposes as:
- Basic Research - Work undertaken for the advancement of scientific knowledge without a specific practical application in view;
- Applied Research - Work undertaken for the advancement of scientific knowledge with a specific practical application in view; or
- Experimental Development - Work undertaken for the purpose of achieving technological advancement for the purpose of creating new or improving existing materials, devices, products, or processes, including incremental improvements thereto.
It also includes work undertaken by or on behalf of the taxpayer with respect to:
The CRA administers SR&ED but does not create the laws governing SR&ED. While the laws have remained consistent for decades, in 2021, the CRA changed the way of administratively evaluating SR&ED by simplifying eligibility to two questions:
- The Why: Work is conducted for the advancement of scientific knowledge or for achieving a technological advancement.
- The How: Work is a systematic investigation or search in a field of science or technology by experiment or analysis.
Historic CRA administered SR&ED using five questions, which incidentally are also supported by jurisprudence:
- Was there a scientific or a technological uncertainty?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
- Was a record of the hypotheses tested and the results kept as the work progressed?
The new two-question approach still aligns with the historic five-question approach. Regardless of using either approach, the questions are inter-related and need to be considered as a whole. The following graphic helps map the question approach to the T661 filing requirements.
Let’s focus on the Why.
“I have not failed. I’ve just found 10,000 ways that won’t work.” - Thomas A. Edison
Generation or discovery of knowledge is key for work to be conducted for advancement of scientific knowledge or for the purpose of achieving technological advancement. Think about conceptual knowledge such as theories or predictive models, not simply noting factual knowledge such as data, measurements, or mapping.
New scientific or technological knowledge is needed when it is unknown or uncertain if a given result or objective can be achieved, typically because insufficient scientific or technical knowledge is available. Hence, this is called “scientific or technological uncertainty” (TU) and defines the starting point of a SR&ED project.
The “scientific or technological advancement” (TA) is the targeted outcome of the work and attempts to resolve uncertainty. For example, you may attempt to overcome an uncertainty, but fail, and the knowledge of why it failed is an advancement, in that you gained new knowledge of why something worked or didn’t work.
Let’s focus on the How.
Work must be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.
Systematic investigation or search includes:
- Hypothesis that generates an idea consistent with known facts, which serves as a starting point or baseline for further investigation towards achieving your objective or resolving your problem. Ideas may be expressed as a possible solution to a problem, a proposed method, or an approach;
- Testing of the idea or hypothesis by means of experiment or analysis. The idea can evolve and change as a result of testing, i.e., iterations;
- Developing logical conclusions based on the results or findings of the experiment or analysis, perhaps its attempting to secure knowledge of why something failed; and
- Keeping evidence that is generated as the work progresses.
It’s worth emphasizing “incremental improvements” are eligible. In other words, businesses don’t always have to create a whole new product or process. Continuous improvements to current products are equally valid, and developing new knowledge, capabilities, and techniques along the way do count. Intellectual Property (IP) development and contributions to a company’s knowledge base often arise from R&D efforts, and for SR&ED purposes, the work does not have to be patented or even patentable.
When the technological knowledge available to your business is insufficient, attempting to resolve these problems through experiment or analysis will result in the generation of new technological knowledge.
Here are some characteristics of problems that may suggest the technological knowledge is insufficient:
- Existing design methods are not applicable;
- Requirements or specifications do not conform to existing standards;
- Too many variables or unknowns;
- Parameters or conditions are outside of the normal operating range;
- Nature of the problem is evolving;
- Data is not readily available; and
- There are interlocking constraints.
Indicators of potential qualifying SR&ED activities relevant to many industries:
