The CRA pre-screens SR&ED claims, to decide which ones to audit, through computer screening, where artificial intelligence indicates projects for review based on red flags encountered via their predetermined set of risk management algorithms, or human assessment. Sometimes, claims are randomly selected for review. Since the computer and random options are automated, let’s look at the human assessment side.
A CRA science reviewer may pick up a claim that has been passed to him/her via the artificial intelligence screening for evaluation as to whether an audit might be warranted. This first human interaction with the claim is just a cursory read-through where the reviewer is looking for the answer to one specific question – Is there SRED here? To determine this, the reviewer skims the SR&ED project write-ups looking for a “yes” answer to 5 questions laid out in the Eligibility of Work for SR&ED Investment Tax Credits Policy.
Is there SR&ED Here? Answering the 5 SR&ED Eligibility Questions
The write-ups need to be written in such a way that it’s easy for the reader to see that, yes, there is SR&ED here and that the answer to each of the 5 questions is clearly “yes”. A well-written claim can help a reviewer decide to accept your claim as “accepted as filed”, or audit just some of your projects, and avoid the chances of them deciding to review all of your projects.
The 5 questions your claim write-up has to answer “yes” to are:
- Was there a scientific or a technological uncertainty?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
- Was a record of the hypotheses tested and the results kept as the work progressed?
Let’s look at the first question.
Q. 1 Scientific or technological uncertainty
Scientific or technological uncertainty can exist in several areas:
- when you do not know whether an intended result or objective can be achieved based on your current knowledge;
- when current knowledge, known best practices, and information generally available online cannot tell you how to achieve a certain result, what steps to take;
- when research unearths a possible direction or answer, but applying that knowledge from the public domain results in something unexpected that the available knowledge doesn’t address (ie: when a product manufacturer tells you “yes, this product or piece of machinery or ingredient or software program will do what you need” and it doesn’t and the manufacturer can’t tell you why it didn’t work as expected);
- when you use a program or piece of machinery, or combine programs/machinery in ways they’re not designed for and you end up having to modify those to make them work the way you need them to, especially if knowledge available can’t tell you how you can successfully modify them.
You must be able to demonstrate to the CRA in your SR&ED write-up what you wanted/needed to do, and what technological limitations prevented you from being able to accomplish that. Why was the current knowledge or technology available unhelpful? Why didn’t the recipe or solution you found in a Google search solve your problem?
You must also demonstrate what the typical, known, standard approach would have been (if there was one) to solve the issue, and why this approach didn’t work for you in this case.
Q. 2 Did your work include formulation of hypotheses specifically aimed at reducing or eliminating the uncertainty or uncertainties identified in question 1?
Based on what you know about what you’re trying to achieve, and what was preventing you from achieving what you needed (see question 1), where did your team decide to start your investigative work, and why? This is your hypothesis. Your hypothesis must clearly state what was unconventional, non-standard, or less-standard about your approach or strategy to solve the technological uncertainty encountered in Question 1.
Q. 3 Was the overall approach adopted as a result of your systematic investigation process?
The CRA expects that your planned approach is based on the results of your scientific investigative process. That is:
- You’ve formulated one or more hypotheses to address the uncertainties identified in Question 1.
- You’ve planned and executed experimental testing and analysis of the hypotheses generated in Question 2; and,
- Your conclusions are based upon the results of your experimental and analytical findings.
When you test the hypothesis you generated in Question 2 by changing a code a certain way, or adjusting the amount of an ingredient, or modifying a segment of your development process, you’re essentially creating a prototype. For some industries this means building an actual physical prototype of a machine or software program. You need to be able to show in your SR&ED write-up how the changes you proposed and tested helped you meet your objectives or not and why they did or did not. This includes whether the initial problem was resolved, yet testing revealed another issue that you would seek to resolve in your next experiment.
Q. 4 Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
Notice the phrase here is “achieving a scientific or technological advancement” not “unique and innovative product” or “increased functionality that no one else can offer”.
It’s often difficult for researchers and innovators to change their mindset from thinking about the innovativeness and business merits of their product to actually thinking about their project as a way of generating new knowledge or advances in a given industry or technology. The CRA is looking for knowledge generated out of this process that can be applied elsewhere in the business even on a completely different piece of technology or product, that wasn’t there prior to experimentation, and couldn’t have been developed by simply “googling” it and following a set of given instructions. In other words, you couldn’t have gained this knowledge without engaging in your experimental process.
Notice the phrase above also doesn’t say “for the purpose of achieving your project’s objectives”. If your experimental process did not achieve your project’s objectives, you still generated new knowledge as to why your experiment failed, or why the anticipated outcome wasn’t achieved. The rejection of a hypothesis is still an advancement because it eliminates a possible solution.
The new knowledge or scientific or technological advancement doesn’t have to be rocket science or something extremely complicated. Hypothetically, think of someone else in your industry who might have your same skillset and knowledge base, would he/she come to the same conclusions you did about how to solve your problem? Would it have been obvious to them to use that strategy? Is it considered standard practice or “common sense” to use such an approach? Is it something that you suspect other companies are using, but there is no published documentation about how they address the situation within their company?
Q. 5 Do you have records of the experimental process you conducted?
Technically, this question cannot be answered in the written report of your project. The fact that records are available may be mentioned in passing in the report, but unlike the other questions, the direct “yes” answer is not generally included.
Your records of the experimental process you undertook to achieve scientific advancement or new knowledge that would help you solve a problem or overcome a roadblock need to include each hypothesis, the steps you took during each experiment, the outcome of each experiment, and your conclusion – which should lead to the next hypothesis/hypotheses. Your documentation should also include why each experimental step (iteration) was required and how each fit into the project as a whole. You will also need to identify and record the indicators or measures used to determine whether the goals of the work were met.
The records of your experimental and developmental journey are incredibly important to backing up your claim should the CRA request a review of your claim. Other supporting documentation can include video recordings, pictures, drawings, email sequences, invoices, contracts, ruined samples/prototypes/materials or dated photos of such.
During your SRED Unlimited consultation, our goal is to help you uncover the details that will answer the above 5 questions. We have our own set of interview questions that are specifically designed to unearth and collect this information from the work you’ve done. It is not uncommon for researchers/innovators to struggle with viewing the work they’ve completed in these terms. Our interviewing strategy is designed to help you start thinking “SRED-ably” as you move forward in your experimental and developmental journey.