Line 242: Uncertain about Uncertainty? No problem.

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. ***

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  The term ‘uncertainty’ is perhaps the most confusing term in the SR&ED world, however, it is extremely important to understand it. Uncertainty is something you must understand the meaning of if you wish to create a strong, clear SR&ED claim.

What is “scientific or technological uncertainty”?

The CRA explains that 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 For an uncertainty to occur the following things need to occur: first, you encounter a problem. Secondly, after exhausting the entire knowledge base available to you, you determine 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

What isn’t “scientific or technological uncertainty”?

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 your company’s cost target, “cost targets on their own do not create technological uncertainty”.⁷ Although it is possible that “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.

Line 242 – What scientific or technological uncertainties did you attempt to overcome?

When writing your response for Line 242, make sure you include:

• The objective of the project. 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. 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 do not include:

• The word “product” or any commercial sounding language. An SR&ED report with commercial language is an SR&ED report likely to be audited by the CRA. 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
• 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 major role in your SR&ED report. Ensure you do not include any commercial language or excessive words, and instead focus on the big questions being asked. Line 242 on your SR&ED Claim Forms is where you address your uncertainty and prove that advancement was necessary. In Line 244 you will carry on to detail how you tried to overcome the uncertainty you encountered, and in Line 246 you will describe the advancements made. Keep in mind that whether you are successful or not in solving the uncertainty you began with does not affect the eligibility of the project for SR&ED. See our article Technological Advancement: The Core of SR&ED for more information on what qualifies as an ‘advancement’ in the world of SR&ED, and keep in mind that Line 242 is considered the opening of your SR&ED narrative and you should consider the whole narrative when writing it.

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