The SR&ED tax credit program is coming up to its 40th anniversary. While technology has changed significantly over this period it is interesting to note that the criteria and definition of what constitutes as SR&ED on a technical perspective has not changed since the program’s inception in 1985. In fact, the exact same definition and criteria is used by most other countries that have R&D tax credit programs. Understanding how CRA assesses SR&ED claims is key to navigating the program and ensuring that your R&D activities qualify for tax credits.
While the definition has not changed over all these years, I think many would agree that there can be a degree of ambiguity when applying the criteria to a fact situation of a particular R&D project. Even competent technical and scientific professionals in the field, can find the criteria vague and daunting.
While there are court cases that have disagreed with CRA’s conclusion that a project carried out by a company was not SR&ED, it is always very helpful to understand how CRA applies the criteria. Most companies would prefer not to go to court to resolve a dispute with CRA.
Why Understanding How CRA Assesses SR&ED Claims Can Prevent Disputes
Based on our extensive experience with the SR&ED program since its inception, I believe there are 3 key areas that a company should focus on when assessing an eligible SR&ED project.
Base Level Technology
Prior to any meeting you may have with CRA on the review of your SR&ED claim, you can bet the CRA technical advisor will scan the internet to determine if how you developed the technology exists in the public domain. Notice I did not say “what” you developed but “how” you developed the technology. This is key. The focus must be on how you developed the technology. The functionality or what the product can do is essentially irrelevant.
For example, a health care software company is developing a B2C platform by building a mobile app that connects with wearable devices to track vital signs and provide real-time alerts. This is “what” they are developing. The SR&ED however lies in “how” they develop this platform by overcoming challenges in synchronizing data across devices with low latency while maintaining accuracy and battery efficiency.
The Role of Technological Uncertainty in How CRA Assesses SR&ED Claims
Many CRA technical advisors would rank technological uncertainty (TU) as the key SR&ED criteria. The reason is that a SR&ED project starts when you encounter a TU; a SR&ED project ends when you resolve the TU, and the technological advance (TA) is the outcome of TU. In the above example the TU is how you will overcome challenges in synchronizing data across devices with low latency while maintaining accuracy and battery efficiency. The TA is resolving that challenge such that the synchronizing the data is now achieved. It is also important to note that if the company attempted to overcome these challenges, but failed, the project still qualifies as SR&ED as the advance is knowing that these methods or attempts by the company did not work and the TU could not be overcome.
Again, it is the challenge and how you overcame the technical barrier that is the SR&ED.
Testing
The 3rd SR&ED criteria is the systematic investigation and testing is a key part of this criteria. To many CRA technical advisor testing provides the clue to the TU and whether SR&ED versus routine work is being done. CRA will want to know the reason for the test; the type of test carried out; the results of the test and the impact of the results on the project.
As the CRA technical advisor will have an understanding of the technology you are developing, understanding the specific tests carried out will provide them with evidence if a TU had been overcome and the project is not routine.
RDP has prepared over 10,000 R&D tax credit claims. While our audit rates are well below industry averages, we’ve been through CRA reviews and therefor have methods to ensure we get optimal results. Having consulted companies since 1987, we have a wealth of information regarding the SR&ED tax credit program. If you have any questions regarding the SR&ED program or wish to have a free assessment to qualify your project as eligible for the SR&ED tax credits, please contact us.