On December 19, 2012 the CRA released a consolidated document to replace all prior:
Interpretation Bulletins (IT’s)
Information Circulars (IC’s)
Application Policy Papers (APP’s)
related to SR&ED credits.
While the CRA claims that this change does not represent any new policies they do provide clarification on certain issues and in some cases remove ambiguities among former documents.
Perhaps the most significant “new” analysis is an attempt to correlate the CRA’s 3 component eligibility criteria to the 5 criteria used by the Tax Court of Canada.
Income Tax Act Definition of SR&ED
SR&ED is defined for income tax purposes (subsection 248(1) of the Act), 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,..
(b) applied research,.. 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,…”
CRA Definition of a SR&ED Project:
“To establish whether or not the work you claim is eligible, we have to examine eligibility at the project level. You must present your claim showing your work organized as SR&ED projects.”
“An SR&ED project consists of a set of interrelated activities that meet the three criteria of SR&ED defined in the current version of Information Circular 86 4, Scientific Research and Experimental Development.
This means that the set of activities must be necessary for;
the attempt to achieve specific scientific or Technological Advancement
overcome scientific or technological uncertainty, and
must be pursued through a systematic investigation by means of experiment or analysis performed by qualified individuals.”
Tax Court of Canada (TCC) – outlines SR&ED process
In the landmark SR&ED tax case of Northwest Hydraulics the judge stated 5 questions which have become the basis for evaluating SR&ED projects:
Is there a technical risk or uncertainty?
Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty? This involves a five stage process:
the observation of the subject matter of the problem;
the formulation of a clear objective;
the identification and articulation of the technological uncertainty;
the formulation of an hypothesis or hypotheses designed to reduce or eliminate the uncertainty;
the methodical and systematic testing of the hypotheses.[/ol=2]
Did the procedures adopted accord with established and objective principles of scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?
Did the process result in a technological advance, that is to say an advancement in the general understanding?
Although the Income Tax Act and the Regulations do not say so explicitly, it seems self-evident that a detailed record of the hypotheses, tests and results be kept, and that it be kept as the work progresses
The CRA has addressed these questions and attempted to correlate them with their own 3 step format.
Role of the “expert witness”
As a background to his decision, the Federal court judge in the case of RIS Christie provided an overview of the role of the scientists in determining SR&ED eligibility stating,
“What constitutes scientific research for the purposes of the Act is either a question of law or a question of mixed law and fact to be determined by the Tax Court of Canada, not expert witnesses, as is too frequently assumed by counsel for both taxpayers and the Minister.
An expert may assist the court in evaluating technical evidence and seek to persuade it that the research objective did or could not lead to a technological advancement. But, at the end of the day, the expert’s role is limited to providing the court with a set of prescription glasses through which technical information can be viewed before being analyzed and weighed by the trial judge.”
Defining the “Scientific method”
The classical definition in the Oxford English Dictionary states;
“The scientific method is a method of procedure that has characterized natural science since the 17th century, consisting in
experiment, and the
formulation, testing, and modification of hypotheses.
A modern update from Wikipedia:
“Scientific method refers to a;
body of techniques
for investigating phenomena,
acquiring new knowledge, or
correcting & integrating previous knowledge.
To be termed scientific, a method of inquiry must be based on gathering empirical and measurable evidence subject to specific principles of reasoning.”