Gold Nugget: SR&ED Business Context

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. *** 

Framing SR&ED within different business contexts.

Framing SR&ED within different business contexts.

While most people don’t often think about what’s happening at the Tax Court of Canada, taking the time to read through their website can yield some golden nuggets of useful SR&ED eligibility information.

Throughout the SR&ED Education and Resources Gold Nugget series, we’ll be digging up some of the most informative hearings judgments from the Tax Court of Canada, as they can help answer some of the most frequently asked questions regarding the SR&ED program.

A question often heard at The InGenuity Group is:

Someone else has already built a similar product, is my work still eligible?

The answer is yes.

We are going to assume that you are doing SR&ED-eligible work, namely that you’ve met the other eligibility criteria regarding Uncertainty, Advancement, Systematic Investigation, etc. and perhaps read our posts on SR&ED eligibility. The only issue is that the company next door has a product that does exactly the same thing. 

The Canada Revenue Agency took business context into account when developing the SR&ED program. The CRA recognizes that, while someone else may have a similar product, the information regarding how the product achieves its goal is proprietary. Consequently, two organizations may be next door to each other developing a product that produces the same result, but each organization will do so in a different way.

CRA Documents Re: Business Context

Previously, the CRA used document IC86-4R3 to determine SR&ED eligibility, the specific wording was as follows:

Scientific research and experimental development varies in content as well as complexity in a given field. The technical uncertainties encountered by one taxpayer may well be looked upon as facts easily obtained by another. The judgment as to eligibility should be made within the context of a single company and its field of business. Specifically, the activities undertaken to resolve technical uncertainties are eligible if the taxpayer cannot obtain the solutions through commonly available sources of knowledge and experience in the business context of the firm. We expect that any firm claiming expenditures for scientific research and experimental development activities will have or will access the expertise necessary to carry out a viable program.1

In the IC86-4R3’s modern equivalent, Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives, the wording focuses on the scientific or technological advancement achieved by a particular company to address a corresponding uncertainty:

Work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement (contained in paragraphs (a) to (c) of the definition). The key to both is the generation or discovery of knowledge that advances the understanding of science or technology.

How can you determine when new scientific or technological knowledge is needed? It is needed when it is unknown (or uncertain) whether a given result or objective can be achieved, due to an insufficiency in the available scientific or technological knowledge. This is referred to as a scientific or technological uncertainty. Note that 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.

The recognition that scientific or technological uncertainty exists marks the starting point for the SR&ED work, while the advancement is the targeted outcome of the work. Therefore, an attempt to resolve scientific or technological uncertainty is an attempt to achieve scientific or technological advancement.2

In plain language, the CRA:

  • Understands that what is perceived as a “technological uncertainty” varies by organization;
  • Considers technological uncertainties to be eligible if you have exhausted publicly available sources of information both external (i.e. searchers in journals, online, etc.) and internal (i.e. knowledge and experience of the team);
  • Expects you will hire or contract appropriate individuals if the expertise is not available in-house; and,
  • Will consider the eligibility only within the context of a single company and its field of business.

Wait, but my reviewer said…?

Variation in the interpretation of “business context” exists and has been noted multiple times in past submissions to the Department of Finance. One excerpt reads:

Scientific Research and Experimental development activities need to be assessed for eligibility in the context of what technical information was available to the taxpayers at the time the SR&ED occurred. The determination of what is and what is not SR&ED work in any industry is a context dependent subjective decision. Without any specific science audit guidelines to follow, each decision will be based on the reviewer’s experience, standards, work ethics, and training. Even with guidelines, without a process to implement the guidelines, people revert back to their own standards base, which may or may not be appropriate for the review under consideration.3

Court Cases Regarding Business Context in SR&ED

There are many Tax Court of Canada rulings regarding “business context.” The earliest we found referred to Northwest Hydraulic Consultants Ltd. v. The Queen, which ruled:

[A] technological advance in Canada does not cease to be one merely because there is a theoretical possibility that a researcher in, say, China, may have made the same advancement but his or her work is not generally known.4

In the 2008 ruling on Logitek Technology Ltd. v. M.N.R., (read more about the case in our Logitek Part One and Part Two posts), the judge specifically commented on this point:

If a taxpayer undertakes SR&ED activities to solve a technological problem, the activities should qualify, even if those SR&ED activities were not necessary because there was an existing solution in the marketplace that the taxpayer was not aware of. I think the wording of the definition of SR&ED in the statute supports this view, and I quote from the relevant definition in the statute: “work undertaken for the purpose of achieving technological advance.” The emphasis in the statute on the purpose of the work suggests that the SR&ED activity should qualify based on what the taxpayer was trying to achieve, and the means that the taxpayer used to do so. It should not be disqualified merely because there was a solution available in the marketplace if the taxpayer was unaware of it. [Emphasis added]5

In the same case, the judge highlighted this point in the summary, almost reprimanding Mr. Dutch, who wrote the science report for the CRA:

I would comment briefly that I have some difficulty with some of the reasoning in Mr. Dutch’s report. Specifically, it appears that Mr. Dutch may have approached the problem on the basis that activities would not qualify as SR&ED if there was an existing computer program in the market that solved the technological problem that was identified by Logitek. It is not entirely clear to me that Mr. Dutch took this approach, but if he did, I have some difficulty with it because I do not think that the statutory provisions are so restrictive.

It should be noted that the taxpayer must always clearly demonstrate that they have done their due diligence.

How can I demonstrate that I met the requirements of SR&ED Eligibility?

When starting any business or research project, one (theoretically) begins by seeing what is publicly available that could be used in order to reduce wasted effort and to avoid duplication. The same holds true for all potential SR&ED-eligible projects. Be sure to regularly perform and document your searches in the following areas:

  • Internet searches, incl. blogs, discussion forums, whitepapers, etc.
  • Professional journals, publications, events and presentations
  • Industry-specific associations & their resources
  • Government reports, regulations, and technical papers
  • Recognized sources of techniques and methods specific to your industry
  • Any other sources of information regarding processes, methods, techniques, etc. that you can publicly access.

The burden of proof will lie with the taxpayer. Consequently, it’s encouraged that you regularly consult these (and other) sources to see if there are any updates. Remember as well, that it’s important to have the right employees and/or contractors at your disposal.

This is echoed in the SR&ED Salary or Wages Policy, which states:

“Directly engaged” work could include hands-on work performed by both specialized and non‑specialized employees. Whether the work of a non-specialized employee can be considered work “directly engaged in SR&EDSR&ED” is a question of fact. This would be the case only if the following conditions are met:

  • The work performed by the non-specialized employee must be directly in support and be an integral part of the basic or applied research or experimental development work.
  • The non-specialized employee’s work must be supervised by staff with scientific or technological qualifications.6

It is expected that the work will be performed or directed by specialized, qualified individuals who are knowledgeable in the field and have relevant experience in science, technology, or engineering, although the qualification is not necessarily limited to formal training, it may also include skills and knowledge gained through experience.

To summarize, even if your neighbour is developing the same product as you, it shouldn’t matter when the CRA assesses the eligibility of your project (unless your neighbours is an open-source product). Maintaining contemporaneous documentation and records that provide evidence of your due diligence, and the experience of your team will help reduce the risk of a lack of documentation or proof becoming an issue.

*** This information is presented for educational purposes only and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual tax situation. *** 

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Show 6 footnotes

  1. Government of Canada. (April 24, 2015). A brief history of the guidance on the eligibility of work. Accessed February 9, 2023, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/a-brief-history-guidance-on-eligibility-work.html
  2. Government of Canada. (August 13, 2021). Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives. Accessed February 9, 2023, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html
  3. Department of Finance Canada. (November 28, 2007.) Research Support Services Inc. Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives. (Accessed: August 18, 2017.) Retrieved from: http://www.fin.gc.ca/consultresp/sredresp_51-eng.asp.
  4. Tax Court of Canada. (May 1, 1998.) Tax Court of Canada Judgments: Northwest Hydraulic Consultants Ltd. v. The Queen. (Accessed: August 18, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/24675/index.do.
  5. Tax Court of Canada. (July 11, 2008.) Tax Court of Canada Judgments: Logitek Technology Ltd. v. M.N.R.. (Accessed: August 18, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/24675/index.do.
  6. Government of Canada. (December 18, 2014.) SR&ED Salary or Wages Policy: 7.1.1 Non-specialized employees who are directly engaged. Accessed February 9, 2023, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/salary-wages-policy.html.

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