Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives
Date: August 13, 2021
These guidelines replace the Eligibility of Work for SR&ED Investment Tax Credits Policy, which has been archived.
The definition of SR&ED given in subsection 248(1) of the Income Tax Act has not changed. The new guidelines feature simplified explanations of our program requirements, clear breakdowns of what constitutes eligible work, and links to further guidance on what you can claim and how to support your claim.
Understanding the eligibility of work is essential to filing a claim for Scientific Research & Experimental Development (SR&ED) tax incentives. Use these guidelines to gain a better understanding of SR&ED and to recognize eligible work more easily.
Work is eligible when it meets the definition of SR&ED in the Income Tax Act (the Act).
SR&ED is defined in the Income Tax Act
SR&ED is defined for income tax purposes in subsection 248(1) of the Act as follows:
(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
(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
Requirements for work to be eligible
The definition describes why and how SR&ED is conducted, which are two key requirements that must both be met for work to be eligible as SR&ED.
The "Why" requirement
Work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement (contained in paragraphs (a) to (c) of the definition). The key to both is the generation or discovery of knowledge that advances the understanding of science or technology. The type of knowledge in this context is conceptual knowledge, such as theories or prediction models, rather than just factual knowledge, such as data or measurements. Categorizing this knowledge as being either scientific or technological is not important when it comes to determining the eligibility of work, as both scientific and technological knowledge are eligible.
How can you determine when new scientific or technological knowledge is needed? It is needed when it is unknown (or uncertain) whether a given result or objective can be achieved, due to an insufficiency in the available scientific or technological knowledge. This is referred to as a scientific or technological uncertainty. Note that the available knowledge is the combined scientific or technological knowledge of the resources within your business and those sources that are reasonably available to you publicly.
The recognition that scientific or technological uncertainty exists marks the starting point for the SR&ED work, while the advancement is the targeted outcome of the work. Therefore, an attempt to resolve scientific or technological uncertainty is an attempt to achieve scientific or technological advancement.
When faced with such an uncertainty, if you do not address it, or you circumvent it with a workaround using available knowledge, then the work will not be eligible. However, if you try to resolve the uncertainty and your work is an attempt to generate or discover new scientific or technological knowledge, your work will meet the "Why" requirement.
Note that success or failure in meeting your objectives is not relevant when assessing whether your work meets the “Why” requirement. The definition of SR&ED only requires that the purpose of the work be for achieving scientific or technological advancement, or in other words, for the purpose of generating or discovering scientific or technological knowledge that advances the understanding of science or technology.
When you decide to try to resolve the scientific or technological uncertainty you are facing, how your work is conducted is also important for eligibility.
The "How" requirement
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 (contained in the beginning of the definition).
Businesses follow known design methods, techniques, procedures, protocols, standards and other practices. Problems are often solved using a systematic approach that follows established procedures and standards. Nonetheless, it is not enough that work be carried out systematically in order for it to be eligible for SR&ED tax incentives.
It is important to distinguish between a systematic approach to carrying out work and the approach that is a systematic investigation or search called for in the definition of SR&ED. The latter approach includes:
- Generating an idea consistent with known facts, which serves as a starting point for further investigation towards achieving your objective or resolving your problem. Your idea may be expressed as a possible solution to a problem, a proposed method or an approach. This can be referred to as a hypothesis.
- Testing of the idea or hypothesis by means of experiment or analysis. The idea can evolve and change as a result of testing.
- Developing logical conclusions based on the results or findings of the experiment or analysis.
- Keeping evidence that is generated as the work progresses.
Categories of eligible work
Experimental development is, by far, the most commonly claimed category of work. This work is conducted in an attempt to generate or discover technological knowledge or know-how in order to develop new or improved materials, devices, products or processes. An example of where it could occur might be during the scale up and optimization of processes to enable large scale and rapid production of a vaccine.
The "Why" requirement in the context of experimental development
In the context of experimental development, the work is conducted for the purpose of achieving technological advancement. In other words, the work is conducted for the generation or discovery of knowledge that advances the understanding of technology.
When developing new or improved materials, devices, products or processes, problems can occur when there is a need to achieve a set of features, functions or capabilities, while being restricted by a set of constraints. 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;
- There are interlocking constraints.
Sometimes there is little doubt that a product or process can be developed when cost targets are not a barrier. In commercial reality, however, a reasonable cost target is always an objective. Although such cost targets on their own do not create technological uncertainty, trying to meet them might. Thus, a technological uncertainty may arise that is imposed by economic considerations.
In experimental development, the attempt to generate new technological knowledge for the purpose of creating new, or improving existing, materials, devices, products or processes can occur in different situations. It can occur when there is a need to generate entirely new technology to meet your objective; when there is a need to make improvements to existing technology; or when there is a need to take existing technology and apply it in a new environment or context to meet your objective. Regardless of the situation, what is required is that the work be conducted for the purpose of advancing the understanding of technology, given there is an insufficiency of technological knowledge to achieve your objective. This new technological knowledge can be incorporated in the new or improved materials, devices, products or processes, and is often represented by the technological know-how, methodologies or techniques gained. Technological know-how includes the knowledge of how various constituents are embodied within the materials, devices, products or processes, and work together to meet your objective.
Acquiring available knowledge or know-how, for example, through training, on-the-job learning, hiring expert employees or consultants, or by purchasing proprietary knowledge does not meet the requirement of attempting to achieve technological advancement.
Basic research is carried out to advance scientific knowledge without a specific practical application in view. The intent is to expand the existing scientific knowledge base. Traditionally, basic research has been performed by universities, government laboratories and other non-profit research institutions. However, many new businesses using biotechnology, nanotechnology, advanced materials and computer applications have merged the pursuit of basic research with business. The results of basic research are usually published in scientific journals. An example of basic research is the study of a newly discovered virus to better understand its characteristics.
Applied research is also carried out to advance scientific knowledge, but with a specific practical application in view. Similar to basic research, applied research is often carried out in a laboratory setting and the results may be published in scientific journals. An example of applied research would be efforts to develop a vaccine against a new virus by exploiting some identified characteristics of that newly discovered virus.
The "Why" requirement in the context of scientific research
In the context of scientific research, both basic and applied research are categories of work that are conducted for the generation or discovery of knowledge that advances the understanding of science.
When it is uncertain whether a given result or objective can be achieved, due to an insufficiency in the available scientific knowledge, then further scientific study through experiment or analysis will result in the generation or discovery of this scientific knowledge.
Given the similarity between experimental development and applied research, both having an application in view, many of the characteristics of experimental development discussed above will also extend to applied research.
Paragraph (d) work in the definition of SR&ED is commonly referred to as support work. This work must be with respect to one of the following eight categories:
- Operations research
- Mathematical analysis
- Computer programming
- Data collection
- Psychological research
Support work is not SR&ED on its own. However, it can be part of the SR&ED if it is commensurate with the needs and directly in support of basic research, applied research or experimental development work that is undertaken in Canada.
Categories of ineligible work
Certain work is specifically excluded from the definition. Excluded work is identified in paragraphs (e) to (k) of the definition of SR&ED, namely:
- Market research or sales promotion
- Quality control or routine testing of materials, devices, products or processes
- Research in the social sciences or the humanities
- Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas
- The commercial production of a new or improved material, device or product, or the commercial use of a new or improved process
- Style changes
- Routine data collection
Collectively, these paragraphs are referred to as the exclusions. This work cannot be claimed.
The exclusions help to delineate work that is included in the meaning of SR&ED, and work that is not. Excluded work should only be considered after you have identified that eligible work has been performed. This could mean that even if some of your work falls in the excluded categories, you may still have other work that is eligible. For example, your business may be conducting SR&ED while at the same time prospecting for minerals. You will file an SR&ED claim for your eligible work, but the work with respect to prospecting for minerals must be excluded from your claim.
Distinguishing between support and excluded work
A key feature that can help you distinguish between support work and excluded work is purpose. Why was the work done? Was it carried out specifically to perform the scientific research or experimental development? Or was it done for some other reason?
For example, data collection can be carried out as a routine activity for supporting normal business operations, such as quality assurance or quality control or both. In this case, the data collection is routine. Such routinely collected data may be useful to your SR&ED work as well. However, since the purpose of such data collection is to support normal business operations, such work is excluded from the work claimed for SR&ED tax incentives. On the other hand, if data collection is carried out to directly support the scientific research or experimental development work, then it would be eligible as support work because it is carried out specifically for the purpose of performing SR&ED.
What to do next
Now that you have a better understanding of the eligibility requirements, find out What you can claim. This page will help you separate your eligible work from other activities, link your work to the expenditures you can claim and present your work as an SR&ED project.
Keep the information you generate as your work progresses so you can Support your claim.
For general information on the SR&ED Program, how to claim SR&ED tax incentives, the services we offer and how to contact us, go to Scientific research and experimental development Tax Incentive Program.
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