In the competitive landscape of the tech industry, companies engaged in AI, computer science and software engineering continually seek innovative solutions to stay ahead. One often overlooked but critical area in software development is the concept of system uncertainty.
The concept of technological uncertainty is a key part of an SR&ED tax credit claim. Companies that can identify and document uncertainties encountered during their innovative projects may qualify for these tax incentives. This tax credit program allows Canadian-controlled corporations, both small and large, to recoup some of the expenses they incur during the quest to advance technology or improve upon existing solutions. An experienced SR&ED consultant can help determine the difference between trial and error and systematic experimentation in dealing with system-level uncertainty.
What is System Uncertainty?
At its core, system uncertainty (also system integration uncertainty) pertains to the ambiguity or unpredictability associated with the performance and behaviour of a software system as a whole. This can often be dictated and affected by trying to combine or integrate multiple components. The system uncertainty requires experimental interactions, including modifications of the interfaces between different components to be integrated.
Technological uncertainty arises when there’s no known solution or methodology available, based on generally accessible information, to achieve a specific technological goal. Essentially, it means developers don’t know if or how a technological challenge— in this case, integrating various components— can be overcome based on the current state of knowledge.
Complexity vs Uncertainty
Just because a task is complicated doesn’t automatically mean there’s technological uncertainty. The solution to completing a complicated task may still be achieved using best or standard engineering practices. For there to be uncertainty, there must be doubt if the goal can be achieved at all or whether available technologies or knowledge are sufficient to get you to the end of your project. Challenges like market competition or management decisions also do not qualify as technological uncertainties.
The SR&ED program is designed to encourage businesses to engage in experimental projects that challenge the status quo and push Canadian industries forward. Innovation in SR&ED isn’t about creating new technologies or functionality but about the experimental ways in which companies try to implement and often combine technologies to meet evolving technological needs and the knowledge generated through this experimentation. For many companies, there is no simple plug-and-play solution.
SR&ED: A Puzzle without a Picture
With regard to system uncertainty in SR&ED, think of a “system” in this context as a jigsaw puzzle. Each piece is a different software component. Innovation often involves building a new jigsaw puzzle with multiple disparate components to achieve a particular goal without a picture to go by. There’s no way to know how these pieces might actually go together, and there’s no way to predict how these individual pieces will react once you get them to fit together (technological uncertainty). The only way to find that out is to systematically test each one.
Trying each one out just to see what happens is trial and error, not the systematic experimentation that SR&ED requires. But usually, each test in these kinds of integration projects starts with a hypothesis or assumption about why combining these components might work or how you might be successful in combining these components. There might be further hypotheses about what you might do to resolve a problem that arises from trying to combine them—“we think doing this might solve the problem because…”
The Pieces of an SR&ED Puzzle
Each of these pieces likely has some documentation that may or may not support the idea of combining them with other components you might need to use to reach your objectives. However, this documentation can often serve as a starting point for experimentation.
For example, if the documentation indicates that combining that technology with one of your other components is not recommended, your expertise as a software developer or engineer may lead you to believe that it might, indeed, be possible anyway. This would be a good basis for an SR&ED hypothesis.
Another example is where some documentation claims, “Yeah, that’ll work,” but you find that when you actually try it, it doesn’t work at all or introduces an unanticipated technological challenge down steam. Perhaps it works with the first component you integrate with but stops working when you add the next piece, and there’s nothing in the documentation to indicate why.
Your company may have a completely proprietary and nonstandard infrastructure or framework, so at the outset, it’s known how to get a more standard piece of software to work within the constraints of your system.
In some of these experimental cases, the conclusion may be that you cannot ultimately get the combination to work how you need to to achieve your goals, and further work is abandoned.
All of these may be valid cases for an SR&ED claim.
Putting the SR&ED Puzzle Picture Together
If the existing technology and documentation can only take you part of the way to completing your objective, the knowledge you have to generate to go the rest of the way may be eligible for SRED.
System uncertainty embodies the dynamic tension that exists between well-established knowledge, and the novel objectives companies strive for, aptly termed the “Knowledge Gap.” This gap represents the difference between prevalent knowledge and a company’s innovation goals.
When traditional methodologies fall short, and even domain expertise cannot offer immediate solutions, companies have to experiment. By doing so, businesses are not merely advancing the frontier of technological possibilities but may also be positioning themselves to benefit from SR&ED tax incentives, which they could further invest in their pioneering projects.
An experienced SRED Unlimited consultant can help you piece together the puzzle of your experimental projects into an SR&ED claim.