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 applying to the Canada Revenue Agency for Scientific Research & Experimental Development (SR&ED) investment tax credits, the information you provide in each section can ultimately decide its fate in the hands of a discerning CRA agent. Make sure you are on target for a successful application by considering the information provided below.
T661 Line 246: Scientific or Technological Advancement
Line 246 gives you 350 words to explain the “new scientific knowledge you gained or the technological advancements you achieved, or attempt to achieve” throughout the duration of your SR&ED project.1
The CRA requests you focus on the “advancement in the underlying science or technology” and avoid focusing on “how the work advanced your business or business practices”.2
So what does the CRA mean by “advancement”? Let’s look at the SR&ED Glossary definition below:
“Scientific or technological advancement is the generation or discovery of knowledge that advances the understanding of science or technology.”3
If advancement enriches the “understanding of science or technology”, it will expand the knowledge base.4 The knowledge base is composed of the “combined knowledge of the resources within the business and those sources that are reasonably available publicly.”5 Sources can include:
The resources within the business include both:
- its personnel’s scientific or technological knowledge, education, training, and experience;
- its technical capabilities represented by its current products, techniques, practices, and methodologies (for example, trade secrets and intellectual property).
Publicly available sources could include:
- scientific papers;
- internet-based information sources;
- expertise accessible to the business (for example, through suppliers, recruiting employees or hiring consultants or contractors).6
So, if you encountered a problem which the knowledge base did not have a solution to, and you either solved the solution or eliminated a possible solution, you contributed to the knowledge base and created advancement.
However, it is very possible that your “advancement” would not meet the CRA’s definition of advancement. Advancement is not:
- Novelty/Innovation/Uniqueness/Feature Enhancement/Increased Functionality. These properties by themselves can be achieved without scientific advancement.7 While you should focus on writing about how these features arose when demonstrating your advancement, remember that these properties do not inherently signal advancement taking place.8
- Commercial success. If your process, product, material or device enjoyed market success, this, unfortunately, does not count as advancement. A work’s success or failure “when assessing whether your work meets the “Why” requirement” in the SR&ED program.9
Now that you have focused on your advancement and know clearly what it is, how do you demonstrate the advancement to the CRA agent? What are they looking for in your Line 246? Here are some things that you should mindful to include:
- Any failures/rejected hypotheses. Just because your objective was not achieved doesn’t mean advancement did not take place. “The definition of SR&ED only requires that the purpose of the work be for achieving scientific or technological advancement, or in other words, for the purpose of generating or discovering scientific or technological knowledge that advances the understanding of science or technology.”10 Note that stating that something “didn’t work” without specifying why it did not work counts as trial-and-error, which is not eligible for SR&ED.11
- How the advancement increased the knowledge base. One of the key things to address in Line 246 is how the knowledge you generated during the course of your project helped you understand the knowledge base better: focus on “what advances you made to your existing scientific or technological knowledge base that enabled you to achieve your goals”.12 I.e., there was uncertainty which triggered the entire project – how did you gain knowledge to help solve the uncertainty by adding more information to the previously lacking knowledge base? Now that the knowledge base has been expanded, is there potential that “new technological knowledge can be incorporated in the new or improved materials, devices, products or processes, and is often represented by the technological know-how, methodologies or techniques gained.”13
What not to include in your Line 246:
- Learning. Learning is not advancement. Learning is “the acquisition and/or internalization of pre-existing scientific or technological knowledge”. 14 Remember a key part of advancement is that it is able to “be incorporated in the new or improved materials, devices, products or processes”, whereas learning will just be useful for the current project at hand.15
- Functionality alone. While functionality may have played a large role in your advancement’s contribution to the knowledge base, it must be accompanied by the knowledge that enabled your company to perform the functionality. For example, you may have discovered the “optimal processing temperatures of chemicals used in paint manufacturing environments” (knowledge) which allowed you to “process chemicals commonly found in paint manufacturing environments” at a higher hourly rate (functionality).16 The CRA asks that you focus on “advancement in the underlying science or technology” and not “how the work advanced your business or business practices”.17
- More than 350 words. There is a word limit of 350 words for Line 246: depending on your tax software, you may be able to stretch it to 425 words.1819 Regardless, remember to state the most important information first (in case your writing is cut off by the CRA’s tax software) and keep your word count down with acronyms, symbols, and hyphenated words.20
Your explanation of advancement is vital for your project being deemed eligible for the SR&ED tax credit. Here, you are demonstrating that you did contribute to the knowledge base and that you did discover new information that was unknown, or uncertain, prior. Remember to state achievements clearly and not be afraid to show your failures. And always, always remember to place the new knowledge gained – why or why not the objective was realized – at the forefront.