The CRA recently hosted a webinar about the agency’s criteria for assessing the eligibility of SR&ED software claims. Interestingly, the webinar so popular that all 200 of the spaces were filled. A total of 60 slides were presented during the webinar and they can be accessed here.
As we regularly discuss on the website, language and phrasing are critical when it comes to SR&ED. In previous posts, we have emphasized issues with the term technological uncertainty. This is again an issue in the software presentation. On slide 16, the following text appears:
“Scientific or technological uncertainty means whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience.
Scientific or technological knowledge base refers to the existing level of technology and scientific knowledge, and consists of the knowledge of the resources within the company and sources available publicly.
The current state of technology may be insufficient to resolve a problem. Therefore it is important to identify the shortcomings or limitations of technology that prevent the new or improved feature, functionality, (or) capability from being developed.”1
The Income Tax Act doesn’t define technological uncertainty; however, the current policy definitions match the first two bullet points on the slide:
Scientific or technological uncertainty means whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience.
Scientific or technological advancement is the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology2
“Limitations of Technology”
The turn of phrase “limitations of technology” was a term created by the CRA in December 2012 in the Eligibility of Work for SR&ED Investment Tax Credits policy:
Technological uncertainties may arise from shortcomings or limitations of the current state of technology that prevent a new or improved capability from being developed. In other words, the current state of technology may be insufficient to resolve a problem.3
The new Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives states:
When the technological knowledge available to your business is insufficient, attempting to resolve these problems through experiment or analysis will result in the generation of new technological knowledge.4
What is concerning is that “limitations of technology” is featured prominently in the remainder of the slide deck and is treated as the definitive criteria for technological uncertainty; however, the only CRA publication about SR&ED to be cited by the Tax Court of Canada (IC86-4R3) doesn’t bring up “limitations of technology”. Thus, it appears the CRA is assessing software claims in a way that is not consistent with the Federal Tax Court of Canada or the Income Tax Act. This may cause confusion in that applicants may not be aware of this nuance of CRA policy, causing claims to be reviewed.
All of that said, it’s important to note that an absence of a capability in a software product does not equate to a technological uncertainty, nor does the addition of new functionality equate to an advancement. As the slide (in a somewhat verbose manner) states:
“One of the reasons why a certain value of a metric is unachievable may be due to the existence of a technological uncertainty. However, wanting to achieve it is a functional objective, and an attempt to achieve it does not necessarily mean an attempt to achieve technological advancement by eliminating a technological uncertainty.”5
It’s therefore worthwhile having a look at this slide presentation and becoming familiar with the terminology and definitions that the CRA is using when preparing an application for the SR&ED program.
What do you think of the CRA’s recent attempt to discuss software?
- Government of Canada. (August 13, 2021). SR&ED Glossary. Accessed November 29, 2022, from https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html ↩
- Ibid ↩
- Government of Canada. (August 13, 2021). Eligibility of Work for SR&ED Investment Tax Credits Policy. Accessed November 29, 2022, from https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html ↩
- Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed November 29, 2022, 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 ↩
- Canada Revenue Agency. Eligibility of work in SR&ED projects containing software development. Accessed February 2017, from https://www.sreducation.ca/wp-content/uploads/EowSpcsd_wo2-e.pdf ↩