Trial and error or eligible SR&ED experimentation?
Previously, we compared the differences between the Canada Revenue Agency (CRA)’s definition of “Trial and Error” to common public usage of the term. Within the scope of the Scientific Research and Experimental Development (SR&ED) program, adopting a “trial and error” approach to scientific methodologies is extremely risky. Please read Trial And Error: Separating SR&ED From Blind Approaches (Pt. 1 of 2) for more information.
This post will explore the inherent problems with the CRA’s definition of “trial and error” and will draw examples from Tax Court of Canada cases before offering up some useful advice.
Problems With “Trial and Error” [as defined by the CRA SR&ED Program]
From the CRA’s definition of “trial and error” 1
1) “Solving problems by trial and error is not experiment or analysis within the framework of a systematic investigation or search.”
Within the definition of SR&ED, the espoused principles of systematic investigation or search are of particular importance. The systematic investigation or search called for in the definition of SR&ED is “an approach that includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results.”2
Following such an approach from one piece of knowable information and using that as a springboard to launch you into the unknown allows you to form a step-by-step link between what you know is true about your field to what you suspect to be true and wish to test through SR&ED. Furthermore, the due diligence that you perform in order to knock out all known solutions to a problem before moving on to experimental ones allows the CRA to remove all possibilities of the problem being solved through simple technical fixes, routine engineering, or mundane troubleshooting. Therefore, a lack of a hypothesis (a critical part of SR&ED) will render you ineligible.
You must be prepared to answer the question, “what was your hypothesis?”
2) “There is no further analysis of the reason why it did not work to make the lesson applicable in a broader sense.”
The SR&ED program does not require you to be successful or to unequivocally prove your hypotheses – as long as you’ve followed a systematic method, and started from a proven uncertainty, your attempt is all that’s required. This is because, even if you fail, you’re still in a position to understand why you failed in your attempt – and so can contribute worthwhile information to the global repository of scientific and technological knowledge, and save future researchers the prospect of wasting their resources on taking the same path.
However, if you state that you possess knowledge base A, and wish to try methods G, I, and V and provide no reasoning, you have no basis from which to judge your failures or even entirely understand your successes. This disjointed methodology of “trial and error” is equivalent to someone asking you “If oranges are citrus fruits, and kiwis aren’t oranges, why does Sarah’s sister like bananas?” Even if hit-or-miss is your entire approach to scientific research, if you can’t explain why you missed, then you aren’t adding any knowledge of worth beyond “Methods G, I, and V don’t work – again, for no apparent reason whatsoever.” If you don’t know at least some of the possible answers to a question in a scientific process – yes or no, right or wrong – or even the question itself for that matter, then it can’t possibly be an intelligible conversation to begin with. The CRA cannot, in good conscience, ask taxpayers to foot the bill for this brand of disjointed guess work.
In short, you must be prepared to answer the question: “What was your advancement (ie, what new knowledge was generated beyond “this approach didn’t work”)?
Related Court Cases in SR&ED
The perfect example to highlight this point would be Maritime-Ontario Freight Lines Limited v Her Majesty the Queen in 2003. 3 In this legal battle, the appellant hired an engineer in 1995 to improve upon the existing weight measurement system, in a bid to improve its accuracy as well as enhance sensors to lower the bottom limit weight threshold which could be registered on the machines.
Even though there may have been mechanical and software-related uncertainties, the claim was denied by the CRA as well as the court since there was no documentation or systematic approach which could outline the formation of a hypothesis – and therein lies the crux of the matter. Since no evidence of systematic investigation could be unearthed, it made it impossible for the CRA to determine whether routine engineering would have been insufficient to solve the problem.
This case was also important for a second reason. It went on to define a clearer statement on the legal nature of hypotheses than that presented on the CRA Glossary for SR&ED.
“A hypothesis is a tentative assumption or explanation to an unknown problem and, as a rule, this requirement is met by the existence of a logical plan devised to observe and resolve the hypothetical problem.”
Furthermore, a hypothesis cannot be a broad, sweeping, generalized statement. Instead, it needs to ask a specific query and seek answers within a defined set of possibilities. As defined by a judge in another case where it seemed “too vague”, a hypothesis is “normally considered to mean a provisional concept which is not inconsistent with known facts and serves as a starting point for further investigation by which it may be proved or disproved objectively.” 4
Trial-and-Error: The Verdict
In the end, if you’re still confused about whether you would face similar issues when dealing with your claim, ask yourself the following questions:
- Have I documented my current knowledge base, as well as why none of the present solutions would solve my problem?
- Did I depart in my research from a point of known fact in order to reach a detailed and descriptive hypothesis which could only be answered in success or failure, and not even a partial success?
- Whether I succeed or I fail, am I knowledgeable enough about the question I’ve posed in my hypothesis to be able to understand the reasons behind why one or the other eventuality came to pass?
- Can I indisputably prove the logical chain of thought running through my series of experimentation through the means of my documentation alone, even without any accompaniment of further explanations?
If the answers to the questions listed above are yes, then you are as far from “trial and error” as you can possibly be, and are performing admirably as per the CRA’s standard of requirements. In such a case, you should have no trouble in providing clear answers to these two key questions: What was your hypothesis? and What was your advancement (ie, what new knowledge was generated beyond “this approach didn’t work”)?
However, if your answer to any of the questions listed above is no, and you find yourself stumbling over responses when asked about your hypothesis or advancement, reevaluate your methodology and make the necessary changes to ensure that your approach fits with the CRA’s expectations.
This article is based on CRA policy documents available at the date of publication. Please consult the CRA website for the most recent versions of these documents.
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- Canada Revenue Agency (2015, April 24). Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis? In Eligibility of Work for SR&ED Investment Tax Credits Policy (Chapter 2.1.3). Retrieved July 20, 2015, from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/lgbltywrkfrsrdnvstmnttxcrdts-eng.html. ↩
- CRA. (2012, October 23). SR&ED Glossary. Retrieved July 7, 2015, from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/glssry-eng.html. ↩
- Tax Court of Canada. (2003, September 24). MARITIME-ONTARIO FREIGHT LINES LIMITED vs HER MAJESTY THE QUEEN. Retrieved July 7, 2015, from http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/26629/index.do. ↩
- TCC. (2000, August 30). C W Agencies Inc v. The Queen. Section 23. Retrieved July 7, 2015, from http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/24346/index.do?r=AAAAAQAMOTgtMTMyNC1JVC1HAQ. ↩