A brief history of the guidance on the eligibility of work

Date: April 24, 2015

This section provides historical and background information related to the guidelines and criteria used to determine whether the work carried out by a taxpayer meets the definition of SR&ED in the Income Tax Act. For a history of the definition of SR&ED in the Act and how it has changed over time, see a brief history of the definition of SR&ED .

Before 1985, guidance on eligibility of work, in terms of whether it met the definition of “applied or basic research” or “development” according to the Regulation that existed at that time was provided in the form of Interpretation Bulletin IT-439. Based on the feedback received from taxpayers, 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 definition of “scientific research,” that existed at that time 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 [1]. “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.

On March 4, 1986, responding to Revenue Canada's request for clarification of the meaning of the term “experimental development” (ED), the Department of Finance confirmed that:

“With respect to the general guidelines, this department is in basic agreement with the approach being taken, namely that to qualify for the research and development tax incentives, an activity must embody some scientific or technological advancement, have some elements of scientific or technological uncertainty, and be carried out in a systematic and organized fashion. In other words, the research or development activity will advance our understanding of scientific or technological relationships. In our view, these criteria capture the spirit and intent of the legislation.”

In 1986, Information Circular 86-4 Scientific Research and Experimental Development was issued. It was a guideline developed by industry leaders and Revenue Canada on how to apply the term "Experimental Development and Scientific Research". This document described essential tests (namely the criteria of scientific or technological advancement, scientific or technological uncertainty, and scientific and technical content) that had to be met before work could be considered scientific research and experimental development. The three criteria became a tool on how to apply the term Experimental Development, especially in an industrial context, and a cornerstone for identifying whether work met the definition of SR&ED in the Act. Although revisions of Information Circular 86-4 were issued (the latest being IC 86-4R3 in 1994), the three criteria remained intact.

Although there have been numerous changes to the legislation, the clarification, which was made in 1992, of the erstwhile definition of experimental development is of particular importance to the application of eligibility requirements. This clarification was intended to focus on the purpose of experimental development. It confirmed that “[…] development work that is experimental in nature and that is undertaken for the purpose of achieving technological advancement for the purpose of creating or improving existing materials, qualifies, but development work that is routine in nature does not qualify…” [2].

In 1998, Judge Bowman issued a decision in Northwest Hydraulic Consultants Limited v. The Queen based on his understanding of the concepts laid out in IC 86-4R3 [3]. He set out an approach to determine whether the claimed work met the definition of SR&ED. His approach provided an understanding of the relationship between the three criteria and the legislative definition of SR&ED. Subsequent jurisprudence has reinforced the approach set out by Judge Bowman. This approach forms the basis of the five questions used to determine if there is SR&ED (please refer to the Eligibility of Work for SR&ED Investment Tax Credits Policy).


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

[2] Government of Canada News Release 92-088, December 2, 1992

[3] Northwest Hydraulic Consultants Limited v. The Queen, 98 D.T.C. 1839, [1998] 3 C.T.C. 2520 (Tax Court of Canada)

Appendix A – Revisions

The following are the explanation of changes to A brief history of the guidance on the eligibility of work on April 24, 2015:

  1. The first sentence of the sixth paragraph was modified to be clear that the clarification was with respect to an older version of the definition of experimental development.
  2. A sentence was added to the last paragraph to explain that the basis of the five questions is the decision issued by Judge Bowman in Northwest Hydraulic Consultants Limited v. The Queen.

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