The Scientific Research & Experimental Development (SR&ED) program provides tax incentives to businesses engaged in research and development (R&D).
Central to what differentiates R&D from SR&ED is the focus on the concept of generating technological advancement and new knowledge through the R&D work conducted.
These details can often be buried in R&D descriptions and discussions. Many innovators and developers want to tell the story of their successes, but so much of the new knowledge and technological advancement gained comes through failed or semi-failed attempts to solve an R&D problem.
It takes a skilled, thorough, and knowledgeable SR&ED consultant to ferret out these details that are crucial to writing up an SR&ED claim. Part of the information gathering for SRED Unlimited consultants includes interviews with key involved developers and innovators to answer 5 questions. Discussions around the answers to these questions have proven over time to be effective in filtering out key SR&ED portions from R&D work.
- Was there a scientific or technological uncertainty?
At its core, scientific or technological uncertainty is the “why” of SR&ED.
Very few innovators start their research and experimental developmental process by saying, “I’m going to work on generating new knowledge about this issue in our industry.” Instead, most—if not everyone—starts out by trying to solve a business problem which requires a solution based on some technology, mechanism or industry strategy.
Sometimes that solution is very clear, sometimes not. Sometimes that solution involves some sort of off-the-shelf or plug-and-play solution, sometimes not. Sometimes that solution may start out seeming simple, then, as implementing that solution continues, it becomes not quite so simple.
When solutions are not clear, not totally solved by an off-the-shelf or plug-and-play method, or not quite as simple as was first assumed, there is potential to find an SR&ED story here.
Some might call these “knowledge gaps”. Existing technologies or resources and knowledge, or industry best practices can only take you so far in your development journey. You have to find a way to bridge the gap between the limits or constraints of what you started with, and where you need to get to, to solve your overall project objectives.
This is where R&D becomes SR&ED.
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
A hypothesis is simply an assumption about how you and your team thought you could solve the “why” of SR&ED identified in question 1. How you thought you could bridge the gap between where existing knowledge, technologies and mechanisms could take you, and where you needed to get to, to solve your business problem.
In the realities of day-to-day business, very few people think, “I hypothesize that if I do this, I will achieve this, generate this knowledge and solve my business problem.” Unless you’re actually engaged in medical- or chemistry-related research, often, if not always, a hypothesis is much more instinctual, and it is important to fine-tune the more conscious hypothesis through the interviewing process.
Often, over the course of the developmental or research journey, there are multiple hypotheses or assumptions, especially if an attempt to solve a problem fails or doesn’t work quite as expected. This is where we can show the progression of your work.
That leads us to the third question…
- Can the overall attempt to fill in that knowledge gap be described to reflect systematic investigation?
Perhaps one of the more challenging parts innovators and researchers have in writing up an SR&ED claim on their own is being able to understand and describe the difference between “trial and error” and “systematic experimentation.”
Many think that these two phrases are interchangeable; in the SRED world, they actually mean two totally different things. Innovators may find it difficult understand the difference, or may dismiss otherwise eligible work as “trial and error.”
So many in SR&ED interviews are eager to talk about the ultimate solution that worked when it’s actually extremely important to capture the overall developmental journey that eventually led to the working solution or abandonment of a potential solution.
It’s important to show how you started with one assumption, tested it out, observed and analyzed the outcome, and then learned how you needed to modify your original assumption to take the next step in your developmental journey. This is how “trial and error” becomes “systematic investigation/experimentation.”
A skilled SR&ED consultant can help you not only understand the difference but also make sure your claim write-up includes eligible work that might have been otherwise dismissed or overlooked.
- Did the systematic experimentation described in question 3 generate scientific or technological advancement or new knowledge?
One of the common misconceptions about submitting a SRED claim is that only research or innovation work which results in something groundbreaking or akin to rocket science is eligible or worth claiming.
Scientific or technological advancement is, more simply, knowledge generated that was not obvious or easily found through industry and online sources. It may indeed be groundbreaking or rocket science, but it doesn’t have to be, to be potentially eligible for SR&ED.
To, again, translate this more into business-understandable terms, new knowledge or technological advancement is the conclusion or conclusions you might have reached during your step-by-step process (described in #3). This knowledge could have told you:
- you were on the right track and informed the modifications needed for the next step of your experimentation;
- that you solved your problem, and the project is complete; or
- that you need to go back to the drawing board and start over.
In the “how” process of solving the “why” of your innovation work, you may have encountered something entirely unexpected or tested a potential solution that was entirely counterintuitive to what someone else in your industry might recommend. Experts may have told you, “You can’t do that. That won’t work. We have no idea how to help you with that.” If you decide to pursue an experimental process (question 3) under these circumstances, you likely generated new knowledge that’s important to capture.
- Can the progression of work be backed up with documentation?
Documentation is also a critical component of SR&ED. Keeping a detailed record of the hypotheses tested, how you tested them, and the results obtained is essential for substantiating the claim. This documentation provides evidence of the systematic approach and the advancements achieved.
While it’s ideal to have thorough records from the start, our team understands that this isn’t always possible. If the CRA requires additional information, we will help you reconstruct and fill in the gaps in your documentation to defend your claim.
Unlocking SR&ED Potential
SRED Unlimited’s team of experienced consultants provides interactive, customized support for SR&ED claim preparation and submission. We add a personal touch to the process, ensuring your business can maximize eligible expenditures claimed.
To explore how your company’s R&D efforts could qualify for SR&ED tax credits, book a FREE 15-minute consultation with SRED Unlimited. Our consultants provide tailored guidance to help you make the most of the SR&ED tax credits for which you could be eligible.
