A brief history of the definition of SR&ED

Date: April 24, 2015

The federal government has been using the Income Tax Act to stimulate research and development activities for many years. As early as 1944, companies could deduct immediately from their taxable income an amount equivalent to 100% of current expenditures related to scientific research [1].

In 1963, section 2900 of the Income Tax Regulations, which included the definition of “scientific research,” was introduced. This definition did not contain the terms basic research, applied research, or experimental development specifically, though it referred to “acquire new knowledge,” “devise and develop new products or processes,” or “apply newly acquired knowledge in making improvements to existing products or processes.” Scientific research was defined as follows [2]:

(1) For the purposes of paragraph (b) and subsection (4) of section 72 of the Act and subject to subsections (2) and (3) of this section, “scientific research” means a systematic investigation or search by means of experimentation or analysis carried out in the field of science

(a) to acquire new knowledge;
(b) to devise and develop new products or processes; or
(c) to apply newly acquired knowledge in making improvements to existing products or processes.

(2) Where a taxpayer has devised a new product or a new process to which paragraph (b) of subsection (1) is applicable, or where a taxpayer has devised an improvement to an existing product or process to which paragraph (c) of subsection (1) is applicable, “scientific research” in respect thereof shall include development, testing and evaluation of a prototype.

(3) “Scientific research” does not include:

(a) market research;
(b) sales promotion;
(c) quality control of products or materials or routine product testing;
(d) research in social sciences;
(e) prospecting, exploring or drilling for minerals, petroleum or natural gas, including geological, geophysical or related studies;
(f) preparation of specifications and other engineering information required to enable construction of facilities for commercial production; or
(g) preparation, prior to commencement of commercial production, of instructions for the operation of facilities referred to in paragraph (f).

In 1967, section 2900 of the Income Tax Regulations was amended to modify the definition by including the specific reference to basic research, applied research, and development. The definition of scientific research then read as follows [3]:

For the purposes of paragraph (b) of subsection (4) of section 72 of the Act, “scientific research” means systematic investigation or search carried out in a field of science or technology by means of experiment or analysis, that is to say:

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view;

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view; and

(c) development, namely, use of the results of basic or applied research for the purpose of creating new, or improving existing, materials, devices, products or processes;

and, where such activities are undertaken directly in support of activities described in paragraph (a), (b) or (c), includes activities with respect to engineering or design, operations research, mathematical analysis or computer programming and psychological research, but does not include activities with respect to:

(d) market research or sales promotion;

(e) quality control or routine testing of materials, devices or products;

(f) research in the social sciences or the humanities;

(g) prospecting, exploring or drilling for or producing minerals, petroleum or natural gas;

(h) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process;

(i) style changes; or

(j) routine data collection.

Tax reform in the 1970's brought a new renumbering and section 72 became section 37. The definition of scientific research was found in paragraph 37(7)(b). In 1978, section 2900 of the Income Tax Regulations was amended by adding reference to paragraph 37.1(5)(e), effective for the period beginning with a tax year ending after 1977 [4]. There was no other change in the wording.

Before 1985, guidance on eligibility of work was provided in the form of Interpretation Bulletin IT-439. The Department of Finance recognized that the guidance provided in IT-439 was insufficient to explain the meaning of eligible “research” and “development.” The May 1985 Budget Papers issued by the Department of Finance stated that the Department would amend the existing definition of “scientific research” in the Regulations and the Act to include the term “experimental development.” The introduction of the phrase “experimental development” was meant to confirm that “projects involving only routine engineering or routine development” would be excluded [5]. Experimental development was thus set out as an aspect of the more general concept of “development.” Only development activities associated with experimental development would be eligible.

In 1986, the term “scientific research and experimental development” (SR&ED) was introduced as a new title in section 2900 of the Income Tax Regulations to clearly distinguish between eligible development and simply routine engineering and routine development. Section 2900 of the Income Tax Regulations was renumbered as subsection 2900(1) effective May 23, 1985 [6]. The term “experimental development” was not introduced into the body of the Regulation which still used the term “development.” The definition, in subsection 2900(1) of the Income Tax Regulations, read as follows:

For the purposes of this Part and paragraphs 37(7)(b) and 37.1(5)(e) of the Act, “scientific research and experimental development” means systematic investigation or search carried out in a field of science or technology by means of experiment or analysis, that is to say:

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view;

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view; or

(c) development, namely, use of the results of basic or applied research for the purpose of creating new, or improving existing, materials, devices, products or processes;

and, where such activities are undertaken directly in support of activities described in paragraph (a), (b) or (c), includes activities with respect to engineering or design, operations research, mathematical analysis or computer programming and psychological research, but does not include activities with respect to:

(d) market research or sales promotion;

(e) quality control or routine testing of materials, devices or products;

(f) research in the social sciences or the humanities;

(g) prospecting, exploring or drilling for or producing minerals, petroleum or natural gas;

(h) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process;

(i) style changes; or

(j) routine data collection.

In 1994, the term “recherches scientifiques et développement experimental” was replaced by “activités de recherche scientifique et de développement expérimental” in the French version of the Regulations in the Income Tax Act [7].

In 1995, subsection 2900(1) of the Income Tax Regulations was amended as follows, applicable to tax years ending after December 2, 1992 [8]:

  • “For the purposes of this Part and paragraphs 37(7)(b) and 37.1(5)(e) of the Act…” was changed to “For the purposes of this Part and sections 37 and 37.1 of the Act, …”.
  • The term “experimental development” replaced “development” in paragraph (c). Experimental development was defined as “work undertaken for the purpose of achieving technological advancement for the purpose of...” whereas development was defined as “the use of the results of basic or applied research for the purpose of...”.
  • The term “work” replaced “activities” and the support work was grouped in paragraph (d). More importantly, the support work now required two tests, namely “commensurate with” and “directly in support,” instead of only “directly in support”.
  • Support work was expanded to include eight specific categories: engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, and psychological research.

The definition of scientific research and experimental development read:

For the purposes of this Part and sections 37 and 37.1 of the Act, “scientific research and experimental development” means systematic investigation or search carried out in a field of science or technology by means of experiment or analysis, that is to say,

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view,

(c) experimental development, namely, work undertaken for the purposes of achieving technological advancement for the purposes of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto, or

(d) work with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research where that work is commensurate with the needs, and directly in support, of the work described in paragraph (a), (b) or (c),

but does not include work with respect to

(e) market research or sales promotion,

(f) quality control or routine testing of materials, devices, products or processes,

(g) research in the social sciences or the humanities,

(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

(j) style changes, or

(k) routine data collection.

In 1996, the definition “scientific research and experimental development was added to subsection 248(1) of the Act; applicable to work performed after February 27, 1995 [9]. It read “scientific research and experimental development” has the meaning assigned by regulation [10].

In 1998, the definition of SR&ED was moved substantively to subsection 248(1) of the Act. The following changes were also made at that time [11]:

  • the conjunction “or” between paragraphs (c) and (d) was replaced by “and, in applying this definition in respect of a taxpayer, includes”;
  • the wording “that is undertaken in Canada by or on behalf of the taxpayer” was added to the end to paragraph (d); and
  • the term “travaux relatifs à l'ingénierie” was replaced by “travaux techniques” in the French version of the definition.

The definition now reads as follows:

“scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

(c) experimental development, namely, 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,

and, in applying this definition in respect of a taxpayer, includes

(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,

but does not include work with respect to

(e) market research or sales promotion,

(f) quality control or routine testing of materials, devices, products or processes,

(g) research in the social sciences or the humanities,

(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

(j) style changes, or

(k) routine data collection;

On July 27, 2000, subsection 2900(1) of the Income Tax Regulations was amended, applicable to the 1995 and subsequent tax years, to change the definition of scientific research and experimental development from "For the purposes of this Part and sections 37 and 37.1 of the Act…" to "For the purposes of this Part and section 37 of the Act…". In addition, the amended subsection 2900(1) of the Income Tax Regulations was repealed [12].

On June 26, 2013, royal assent was received to legislatively amend the French version of the Income Tax Act to replace "travaux techniques", in paragraph (d) of the definition of SR&ED, with "travaux de génie" in order to be consistent with the English version [13]. It was never intended for there to be a difference between the English and French versions of the Act.

References

[1] Canada. Library of Parliament, Parliamentary Information and Research Services. Scientific Research & Experimental Development: Tax Policy by Odette Madore (Current Issue Review: 89-9E, Revised 27 July 2006)

[2] SOR/63-78, Canada Gazette Part II, Vol. 97, No. 5 (March 13, 1963)

[3] SOR/67-441, Canada Gazette Part II, Vol. 101, No. 17 (September 13, 1967)

[4] SOR/78-749, Canada Gazette Part II, Vol. 112, No. 19 (October 11, 1978)

[5] Securing Economic Renewal Budget Papers tabled in the House of Commons by the Honourable Michael H. Wilson, Minister of Finance, May 23, 1985

[6] SOR/86-1136, Canada Gazette Part II, Vol. 120, No. 26 (December 24, 1986)

[7] SOR/94-686, Supplement to the Canada Gazette Part II, Vol. 128, No. 24 (November 30, 1994)

[8] SOR/95-63, Canada Gazette Part II, Vol. 129, No. 2 (January 25, 1995)

[9] Income Tax Budget Amendment Act, SC 1996, c. 21, s. 60(7)

[10] Income Tax Budget Amendment Act, SC 1996, c. 21, s. 60(2)

[11] Income Tax Amendments Act, SC 1998, c. 19, s. 239(1)

[12] SOR/2000-296, Canada Gazette Part II, Vol. 134, No. 17 (August 16, 2000)

[13] Canada Gazette Part III, Vol. 36, No. 3 (September 17, 2013)

Appendix A – Revisions

The following are the explanation of changes to A brief history of the definition of SR&ED on April 24, 2015:

  1. The last paragraph was modified to express that royal assent to amend the French version of the definition of SR&ED was received on June 26, 2013.
  2. Reference [13] was changed.
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