On March 31, 2015, Judge D’Auray from the Tax Court of Canada in Montreal rendered a ruling that set a precedent for what constitutes “uncertainty” under the CRA’s SR&ED tax credit guidelines. Her ruling also highlighted the role different levels of uncertainty can have on an assessor’s review of a case.
Prior to Judge D’Auray’s ruling, the CRA had been assessing projects and determining the existence of uncertainty only as it relates to the individual activities done within a project. In her decision, Judge D’Auray made it clear that she did not agree with this approach, leading to an overall implication that a high-level of system uncertainty should be acceptable.
Uncertainty versus Complexity
Many people think that just because a project involved a significant time investment or scope, or was complex that it’s a good candidate for a SR&ED claim. In fact, the size and complexity of a particular project does not, in and of itself, mean that the work performed on that project falls within the CRA’s definition of SR&ED. Similarly, the development of a large and complex system does not, in and of itself, mean that an uncertainty existed.
Technological Uncertainty versus System Uncertainty
Scientific or technological uncertainty exists when a given result or objective to be achieved, or a definitive solution to achieve that result or objective, is not available within the existing industry knowledge base or experience. Uncertainty exists if it is unclear or there is reasonable doubt as to whether the project goals can be achieved at all or about which approaches, equipment configurations, system architectures, or circuit techniques, etc., can be used to achieve the desired/needed project objectives. Some paths, approaches, techniques, etc., may be suggested in material from the existing scientific or technological knowledge base, but certain project requirements or constraints may make it unclear as to whether those suggested actions would actually solve the project objectives, particularly without creating new uncertainties.
If technological risks or uncertainties arise from shortcomings or limitations of current industry technology or methods, then it means that existing technology may be insufficient to resolve a problem, and further investigation and experimentation is needed.
(Stay tuned to our blog for more about the difference between technical uncertainty versus technological uncertainty in SR&ED).
System uncertainty is a form of technological uncertainty which can arise when experimental development requires the integration of technologies, even if the components involved in such an integration are generally well known. This is because it is impossible to predict how the components will interact, or how the integrated system will perform due to unforeseeable adverse interactions. The uncertainty itself does not lie in the individual modules or components, but in how the modules or components act together as an integrated system. Systematic investigation or research and development into resolving these uncertainties can lead to technological advancement. System uncertainty exists if the underlying technologies of the components or sub-systems are unable to achieve the technological specifications of the integrated system. This means that, likely, some or all of the underlying technologies of the sub-systems or components would have to be changed.
Your SRED Unlimited Consultant can help determine or discover system uncertainties in your SR&ED projects through their investigation process to maximize your SR&ED claim and potential eligible tax credits.