5 Red Flag Words That Cost Thousands in SR&ED
Updated to Reflect New Policies (2022)
*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. ***
When preparing an SR&ED claim for a project, it is generally advisable to start by putting every detail of the project to paper. This shows the entire scope of your process and makes it easier for the reviewer to understand the work performed. However, once the details have been established, strategic editing can be done to tighten up the SR&ED claim and lower the overall risk of an audit. If you want to learn more, make sure to check our post, Common SR&ED Claim Pitfalls, which outlines some of these strategies.
Trigger Words in SR&ED Claims
Certain words and phrases can make the scope of the SR&ED seem larger (or less eligible for tax incentives) than it actually is. The key is to use language that accurately describes your project, as the wrong words can give the wrong impression – especially if you’re using them in your title, where you’ll want to give a strong impression. When possible, remove these words from your title and claim body:
- “Trial and Error” – Even though engineers often use this phrase to mean sophisticated experimentation, it should not be used in an SR&ED claim. The CRA tends to think this phrase implies unstructured guesswork that falls outside the realm of SR&ED. In Clevor Technologies Inc. v. the Queen (2019), the judge said that “trial and error procedure is routine engineering,” thus interpreting that the work was not SR&ED.1 Therefore, make sure to re-examine the “trial and error” activities and see if it is possible to show a structure associated with them.
- “Product” – This word has commercial connotations that present the SR&ED work as a commercial good or finished product. SR&ED work generally ends once something is being sold. Similar commercial-sounding words such as “sales” and “market” also can misrepresent your SR&ED. In fact, the CRA is clear that SR&ED is not “the commercial production of a new or improved material, device or product or the commercial use of a new or improved process.”2
- “Fine-tuned” – Similar to the word “tweaking”, this term is considered to be associated with minor adjustments after the basic SR&ED work is complete. Anything that seems to play down your project can have the same effect, so look out for any deprecative wording.
- “Application” – Unfortunately, this is another taboo word. Applying a principle suggests that the principle has already been established and is therefore standard practice. Where applicable, try replacing this word with developing methods, which indicates that there is a great deal of work still needed to get to the project’s principal stage.
- “Migration” – The implication here is that the work performed was a simple conversion process, as opposed to innovative development. Unless there was a significant technological obstacle that was overcome and clearly described in the SR&ED claim write-up, migration projects will be seen as standard practice.
Non-quantifiable terms – Phrases such as “It was not evident that ….” and “It was extraordinarily difficult to…” raise the question “Why?” Why was it not evident? Why was it difficult? What resources did you use to determine it was not evident? There need to be statements that establish why something became a technological obstacle requiring a desired technological objective and experimental development.
These are just some of the keywords that are risky to use in a claim – there are dozens more! Often, they are terms that one would never expect, but if you ask yourself, “does this sound commercial” you can avoid many of the non-desirable terms.
We suggest that you have someone else read through your technical narrative before submission using this checklist. While it’s no substitute for having a professional work on your claim, it will help reduce some of the risk. Remember – mistakes in this area typically cost companies thousands in terms of lost time and disqualified expenditures.
Remember to put appropriate time and effort into preparing these documents – the CRA wants to support R&D in Canada, make it easy for them to say “YES!”
These are just a few of the linguistic and stylistic choices to keep in mind while completing your SR&ED tax claim application. To learn more about crafting a strong SR&ED claim, check out our other articles, like Top 10 Things to Remember for your SR&ED Claim and Six Tips for Writing Great SR&ED Technical Narratives.
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- Clevor Technologies Inc. v. the Queen (2019). Retrieved from: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/420116/index.do?q=SR%26ED. ↩
- Canada Revenue Agency, (August 31, 2021.) Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html. ↩