Constructs: The Hidden SR&ED Problem

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No one is talking about the issue of misinterpretation & misunderstanding in SR&ED.

 

In preparing SR&ED applications and communicating with the Canada Revenue Agency (CRA), it can often feel as though you and the CRA are speaking two different languages. The reality is… you probably are. Protect your investment by clearly defining your own terms and by seeking out or requesting written documentation from the CRA for any unclear terms.

Broken Communication: Language Is Imperfect

In Politics and The English Language, (1945) George Orwell criticizes “ugly and inaccurate” contemporary English language.

We may all speak the same language (English, French, etc.), but as a group we often forget that everyone has their own interpretations when it comes to certain words. Our experiences, cultural background, work environment and education all have a significant impact on what we project onto any given concept. This imperfection of language — which is perhaps exacerbated by the imperfection of the English language as a whole — can make a SR&ED review even more difficult.

With the pressure on the CRA to process as many files as possible yet reduce the “risk” by periodically reviewing files that have been flagged as “high risk”, it’s no wonder they are feeling pressed for time. When one is pressed for time — which most companies CTO, CEO, and CFOs usually are — the consideration that goes into word choice in spoken or written language is often minimal. How often do we stop to think about whether terms mean the same to the listener/reader as they do the writer? 

Define Your Terms; Define Your Constructs

When out speaking to business owners, I often describe my role less as a paperwork pusher, and more as a translator. Common terms that are used in the private sector often have considerably different meanings in the public sector. (In fact, we’ve written about the 5 red flag words that you should avoid in your SR&ED claims, but that’s simply scratching the surface.) There are countless other terms that have different interpretations.

Two of the most frequent terms that arise in SR&ED are “Technical” and “Technological.” The new guide to SR&ED (2.1.1 Was there a scientific or a technological uncertainty? – released December 2012) offers the following definitions:

Technical – “A technical problem is resolved by applying practices, techniques, or methodologies that are known by the company or available in the public domain. In other words, the existing technology base or level is sufficient to resolve technical problems. Overcoming a technical problem will not lead to a technological advancement, although it may lead to the creation of a new or improved product or process.”

Technological – “…a technological uncertainty cannot be resolved using the existing technology base or level and requires experimental development to resolve the problem.”

The defining of intangible terms is critical in order to ensure your success. In qualitative research, this is known as defining your “construct,” meaning “an explanatory variable which is not directly observable” (Construct (philosophy) definition via Wikipedia).

Definitions Change. Get It In Writing.

However, the imperfect and ever-evolving nature of the English language means that widely accepted definitions are not set in stone. Such is the case with technical and technological within the SR&ED tax incentive program.

Previously, in Information Circular 86-4R3 (IC 86-4R3), the CRA made numerous mentions of the terms “technical” and “technological” — 28 mentions of technical and 123 mentions of technological in a 15-page document, to be exact. While the CRA has since attempted to clarify these definitions in their new guidelines, the terms are not clearly contrasted side-by-side. Instead, they are buried in Section 2.1.1. This section stipulates that a company may have a technological or technological uncertainty, but an advancement (which is one of the three criteria for judging eligibility) must occur at the technological level.

When you are speaking to the CRA, ask yourself these important questions:

1. Are you using terms that have the same meaning for the CRA as they do for you, the claimant?
2. When you use a new term, have you adequately defined it in order to prevent any misconceptions?

If you have any doubts about either of these questions, protect your SR&ED investment and seek clarification — in writing. It goes without saying that written documents are infinitely more reliable than verbal discussions, so it is in your best interest to contact the CRA and request written documentation to clarify important concepts (i.e. technical and technological) that can make or break your SR&ED claim.