The SR&ED tax credit is a tax incentive that rewards innovative companies by receiving a deduction or a credit based on income expenditures & costs associated with SR&ED activities.
To determine credit eligibility, the Canada Revenue Agency (CRA) has implemented a five-part test. If you want to benefit from the SR&ED tax credit, your project needs to be eligible by answering yes to the following questions:
1.Does your project answer a scientific or a technological uncertainty?
This could also be stated such that you have a problem you are uncertain you can solve with known techniques and cannot “Google” the answer. During the innovation, you may face some uncertainty on whether or how the result can be achieved. It’s during this period you need to show why this is an uncertainty.
2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
To eliminate technological uncertainty, you need to develop hypotheses to overcome your technological uncertainty. It is a critical step in attempting to resolve your uncertainty. The hypothesis is the starting point that unleashes your experimentation to overcome your technological uncertainty/problem.
3. Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
With every attempt to overcome your technological uncertainty/problem your team will be doing to test all hypotheses, you need to follow the scientific method every step of the way. Think back to grade 10 science where you have a hypothesis, you tested your hypothesis, you made observations and you drew conclusions. This can be summarized in what were your attempts to resolve your technological uncertainty/problem?
4. Was the overall approach undertaken for the purpose of achieving a scientif or a technological advancement?
While attempting to overcome your technological uncertainty you attempt one or multiple solutions. The outcome of those solutions, successful or not have resulted in your team gaining knowledge. From this, you determine either that you have overcome your technological uncertainty/problem or that you cannot overcome your technological uncertainty/problem. Regardless you have achieved a technological advancement.
5. Was a record of the hypotheses tested and the results kept as the work progressed?
To quantify your work for SR&ED tax credit, you need to record keep track of the work performed during your experimentation (objective, hypothesis, test, results). Keeping track of hours and resources will allow you to save time during the claiming process.
If you need more information on the five questions , contact one of our experts today!
