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 ***

Do you really know what to add to Line 242 regarding your scientific or technological uncertainty? It may surprise you.

In the Canada Revenue Agency’s T661 SR&ED Tax Claim form, you’re asked to chart your technical narrative, beginning with your encounter with uncertainty. In Line 242, the T661 asks what “scientific or technological uncertainties did you attempt to overcome” during your claimed project.1  Possibly the most confused term in the SR&ED world, uncertainty is something you must understand the meaning of to create a strong, clear SR&ED report.

The CRA says a “scientific or technological uncertainty” is…

The CRA claims uncertainty occurs when whether a “given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of scientific knowledge”.2 This would occur in the following way: first, you encounter a problem. Secondly, you realize, after exhausting the entire knowledge base available to you, that no solution exists or is available. The CRA defines the knowledge base as “the available knowledge is the combined scientific or technological knowledge of the resources within your business and those sources that are reasonably available to you publicly.”3

There are two different forms of uncertainty: in the area of basic/applied research, there is scientific uncertainty and in the area of experimental development there is technological uncertainty.4

The CRA says “scientific or technological uncertainty” isn’t…
  • Complexity: just because there was complexity at the onset of your project does not necessarily mean there was “uncertainty”. This said, if you are unsure how the “the integration of technologies” will result, despite the components being well-known, this is a type of valid uncertainty dubbed “system uncertainty”.5 System uncertainty arises from “the unpredictable interactions between the individual components or sub-systems.”6 Since you may undertake experimentation to establish how to resolve these uncertainties, this counts as SR&ED and is separate from complexity.
  • A cost target. While you may feel that your biggest problem is the bottom line, the CRA does not feel the same way. Despite the cost target sitting on your back, “cost targets on their own do not create technological uncertainty”.7 Although it is possible “a technological uncertainty may arise that is imposed by economic considerations.”, it is the methods that you take to meet the cost target that create uncertainty: for example, “although more costly and proven alternatives exist”, your cost target may force you to choose an uncertain technological route to meet your objective.8
  • A technical problem. A technical problem is where “the existing scientific or technological knowledge base is sufficient to resolve the problem” and no technological advancement occurs when you achieve your objective.9 In the case of the “creation of a new or improved product or process” where there were “no lacking scientific or technological knowledge or principles that prevented you” from creating the new-and-improved product/process, this would not be considered uncertainty. 10
  • Routine testing or data collection. Routine work lacks the crucial uncertainty of SR&ED and “the purpose of such data collection is to support normal business operations”, therefore such work is ineligible for SR&ED tax incentives.11 There are cases when routinely collected data or testing may be useful to your SR&ED work. If the routine work was carried out “to directly support the scientific research or experimental development work, then it would be eligible as support work”12 then it would be considered ‘support work’ and would be eligible for SR&ED tax incentives.
When writing your response for Line 242, make sure you include:
  • The “objective of the project” is essential to include in Line 242. 13 The T4088 advises that you describe “the scientific knowledge or the new or improved capability you were seeking”.14 A complete Line 242 will address this detail. Plainly state what you were trying to achieve and how the uncertainty prevented you from achieving that objective.
  • Why it was not possible to reach your objective is also essential to include.15 You must establish “the shortcomings or limitations of that knowledge base that prevented you from overcoming the scientific or technological uncertainties identified.”16
When writing your response for Line 242, make sure you leave out:
  • The word “product” or any commercial sounding language. An SR&ED report with commercial language is an SR&ED report with a target on its back. While it is difficult to write about basic/applied research or experimental development in a commercial setting without including any commercial language, you must be cautious and discerning when selecting your words. Red-flag words in your SR&ED narrative can cost your company thousands of dollars.17
  • Any more than 350 words. The CRA has a strong 350 word limit for Line 242: so be clear, concise, and make sure you format your narrative correctly.18 Due to disparities between the CRA’s tax software and the one you are using to write your claim (read more on that here and here), you may be able to fit approximately 425 words into the “50 lines” you are given by your professional tax software.19 Regardless, keep it short. There are multiple ways of decreasing your overall word count, like using acronyms, hyphenated words (which count as one word) or symbols.20 Ensure that you address the most important information first, just in case your words are truncated (cut off by the CRA’s tax software).21
Summary

Your technical narrative plays a big role in your SR&ED report. Eradicate any commercial language or excessive words, and ensure you focus on the big questions being asked. Your Line 242, where you address your uncertainty, points out the need for advancement, which you tried to achieve (in Line 244), and how the advancement helped overcome the uncertainty (Line 246). Keep the whole narrative in mind when writing Line 242 as you could easily consider it to be the opening of your SR&ED narrative.

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Show 21 footnotes

  1. Canada Revenue Agency. (8 July. 2022). Scientific Research and Experimental Development (SR&ED) Expenditures Claim. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t661.html
  2. Government of Canada. (August 13, 2021). SR&ED Glossary. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#ncrtnty
  3. Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1
  4. Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1
  5. Government of Canada. (August 13, 2021). SR&ED Glossary. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html
  6. Government of Canada. (August 13, 2021). SR&ED Glossary. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html
  7. Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1
  8.  Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1
  9. “Eligibility of Work for SR&ED Investment Tax Credits Policy.” Government of Canada, 24 Apr. 2015, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1. Accessed 2 Sept. 2019.
  10. “Eligibility of Work for SR&ED Investment Tax Credits Policy.” Government of Canada, 24 Apr. 2015, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_4. Accessed 2 Sept. 2019.
  11.  Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1
  12. Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_1
  13. Government of Canada. (December 14, 2020). Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661. Accessed September 8, 2022 from:https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088/guide-form-t661-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  14. Government of Canada. (December 14, 2020). Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661. Accessed September 8, 2022 from:https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088/guide-form-t661-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  15. Government of Canada. (December 14, 2020). Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661. Accessed September 8, 2022 from:https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088/guide-form-t661-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  16. Government of Canada. (December 14, 2020). Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661. Accessed September 8, 2022 from:https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088/guide-form-t661-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  17. SR&ED Education and Resources. (October 15, 2020). 5 Red Flag Words That Cost Thousands in SR&ED. Lance, Elizabeth. Accessed September 8, 2022 from: https://www.sreducation.ca/5-red-flag-words-that-cost-thousands-in-sred/
  18. Canada Revenue Agency. (July 8, 2022). Scientific Research and Experimental Development (SR&ED) Expenditures Claim. Accessed September 8, 2022 from: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t661.html
  19.  SR&ED Education and Resources. (May 18, 2012). SR&ED Hacks – Hints for SR&ED Writing. Lance, Elizabeth. Accessed September 8, 2022 from: https://www.sreducation.ca/sred-hacks/
  20.  SR&ED Education and Resources. (May 18, 2012). SR&ED Hacks – Hints for SR&ED Writing. Lance, Elizabeth. Accessed September 8, 2022 from: https://www.sreducation.ca/sred-hacks/
  21.  SR&ED Education and Resources. (January 25, 2015). SR&ED Technical Narratives: The Truth About Words Limits. Lance, Elizabeth. Accessed September 8, 2022 from: https://www.sreducation.ca/sred-hacks/

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