What Is a Good Hypothesis for SR&ED Purposes?

June 27, 2018 SRED

If you are filing a claim for the SR&ED tax credit your applicable research will be based on a sound hypothesis.
However, how do you come up with a hypothesis for SR&ED? This article will provide advice on developing a good hypothesis that will pass CRA scrutiny.

If you are filing a claim for the SR&ED tax incentive program, one of the first steps you should take at the start of your research is to develop a good hypothesis that can be systematically tested. This forms the basis of all your subsequent research and development.

Writing a strong hypothesis for the Canada Revenue Agency (CRA) can be challenging for an organization. Hundreds of T661s come through our office and many times the area which needs to be improved the most is the hypothesis. It is important to consider how the CRA defines a hypothesis when writing a technical narrative. However, how do you determine a good hypothesis from a bad one? This article will examine how to develop a hypothesis that will gain the approval of the CRA and lead to a successful SR&ED claim.

What Is a Hypothesis?

Merriam-Webster defines a hypothesis as “a tentative assumption made in order to draw out and test its logical or empirical consequences.” ¹

In the article Forming a Good Hypothesis for Scientific Research, Kendra Cherry further elaborates:

[A] tentative statement about the relationship between two or more variables. It is a specific, testable prediction about what you expect to happen in a study. […] A variable is a factor or element that can be changed and manipulated in ways that are observable and measurable. However, the researcher must also define exactly what each variable is using what is known as operational definitions. These definitions explain how the variable will be manipulated and measured in the study.²

A hypothesis is therefore what a researcher or scientist thinks will happen as a result of their research or experimentation when using multiple variables. A good hypothesis also specifies what variables were included in the research or experimentation and records them so that they can be replicated by another researcher or scientist.

How Does the CRA Define “Hypothesis”?

The SR&ED Glossary defines a hypothesis as “an idea, consistent with known facts, that serves as a starting point for a further investigation to prove or disprove that idea.” ³

In the Eligibility of Work for SR&ED Investment Tax Credits Policy, the CRA further explains:

Formulating a hypothesis designed to resolve the scientific or technological uncertainty is an essential step and requires observing and understanding the subject matter of the problem. Here, ‘hypothesis’ means an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea.⁴

An Example of a Good Hypothesis from the CRA

The CRA provided SR&ED Education and Resources (us) with an example of a hypothesis that would pass muster with them, seeing as there doesn’t appear to be such an example in the online SR&ED policy guides. The following is a hypothetical example of a situation where a hypothesis was used that would pass CRA approval, according to the CRA.

The research and development (R&D) department of ABC Ltd was asked to come up with a solution to improve the bond strength of their premier glue product.

The R&D chemist who was assigned to the project recently came across a published research paper where the researchers used an additive (acting as a bonding agent) to increase the bonding strength of two chemicals that belong to the same class of materials as used in ABC’s premier glue product. However, the conditions (temperature, pressure, humidity) under which the researchers used the additive were quite different than those used by ABC in manufacturing the glue. The chemist carried out further searches in both scientific and technical publications on the use of this additive but found nothing more. There was no way of predicting whether the additive would work in enhancing the bond strength of the glue considering the conditions under which the glue was manufactured.

The chemist hypothesized that, based on the similarity of the chemical properties of the glue ingredients and the two chemicals used in the research paper, the use of the new bonding agent in the manufacture of the glue under the right conditions should increase the bond strength of the glue.⁵

This hypothesis is based on published previous research, highlighting that a good hypothesis is an educated guess based off work carried out in the past.

How Do I Develop a Hypothesis?

You can exhibit creativity or use your intuition in developing a hypothesis, according to Karl Lavoie, a CRA media spokesperson, so long as the hypothesis is used “within a systematic investigation or search” and it is “tested within the framework of experimental development as defined in the Income Tax Act.“ ⁶

A good hypothesis is more than just a hunch or guess. Most researchers base their hypothesis on background research or a previous theory.⁷ CRA policy notes that developing a hypothesis “requires observing and understanding the subject matter of the problem.”⁸ Therefore, a good hypothesis is really an educated guess.

A good hypothesis must also be able to be proven false. This is highlighted in the CRA’s definition of a hypothesis as an idea that can be disproven. If your hypothesis cannot be shown to be wrong, it (and your subsequent research) will enter the realm of “pseudo-science,” or science that makes claims that cannot be proven to be false or be refuted.⁹ This kind of work does not qualify for SR&ED. Even if your hypothesis turns out to be incorrect, the work you did could still qualify for the SR&ED credit, as the CRA notes that “the rejection of a hypothesis is [an] advancement.”¹⁰ Since you have eliminated a possible solution with your results, that represents adding to the scientific or technological knowledge base.

What are the Elements of a Good Hypothesis?

Generally, a hypothesis will have a format that shows that if a change is made to a certain independent variable in the hypothesis, then the scientist or researcher will observe a change to a specific dependent variable.¹¹ A researcher could postulate that “If a subject is more alert, their creativity will increase,” with a variable that measures creativity (such as how subjects answer an exam question) and a variable that records the time of day that the exam question is given to the subject. The independent variable would be the variable that measures the time of day when the subject is likely to be more alert, while the variable that is expected to change is the subject’s creative output.

Variables

A hypothesis is educated speculation about the relationship between two or more variables.¹² Identifying what variables are being tested is another step when forming a hypothesis. Many hypotheses are written, “If XYZ (independent variable) happens, then ABC (dependent variable) will happen.” The independent variable is the variable to which changes can be made through experimentation; the dependent variable will react to those changes.

Experimentation

It is important that a hypothesis can be tested to determine if it is true or false. Once a hypothesis has been written, experimentation can begin to test it. The CRA explains “Experimentation involves structured and organized tests and studies to obtain information in order to address the hypotheses. Experimenting involves not only testing and analyzing but also exploring the relationships between tests, explaining the results as they relate to the hypothesis, drawing conclusions, proposing a new hypothesis, or conducting additional tests.” ¹³

Checklist for a Good Hypothesis

In order to determine if your hypothesis is good, ask yourself the following questions when developing a hypothesis:

Can you actually test your hypothesis?
- Does your hypothesis have a focus on it that can be tested?
Do you have an independent and dependent variable in your hypothesis?
Are you able to manipulate these variables?
Can you test the hypothesis in an ethical manner? (For instance, could the hypothesis lead to a systematic investigation or search where someone is physically or emotionally injured? If the answer is yes, the hypothesis cannot be tested in an ethical way and another method of proving the hypothesis – or a new hypothesis – should be examined instead.)¹⁴

Also, keep in mind the five questions that arose from the Northwest Hydraulic Consultants Ltd. v. The Queen Tax Court of Canada case to determine if a project is eligible for SR&ED. The CRA recommends paying particularly close attention to question No. 2 before developing a hypothesis.¹⁵ All the answers to the following questions must be “yes” for work to be eligible for the SR&ED tax credit.

Was there a scientific or a technological uncertainty?
Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
Was a record of the hypotheses tested and the results kept as the work progressed?¹⁶

Writing the Hypothesis

A hypothesis should not be stated as a question. It should be concise and well written. The technical narrative is read by those with and without a technical background in the CRA. A hypothesis should be understood by those without a technical background but may still include technical information. When writing a hypothesis:

Do background research to identify variables and unknowns.
Ensure that it is a testable theory.
Be concise and specific.

Forming a Hypothesis for SR&ED

Good, sound hypotheses are specific, concise, written as a statement, testable, have an independent and dependent variable, and can withstand experimentation.¹⁷

It is important to note that, for the purposes of qualifying for SR&ED, the hypothesis must also be designed to resolve a scientific or technological uncertainty. This type of uncertainty is defined as “whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience.” ¹⁸

Hypotheses and Knowledge Base for SR&ED

Researching the knowledge base is prior to forming a hypothesis is an essential step in the SR&ED process. The means to prove a hypothesis or its outcome must be unknown based on available knowledge and the results must seek to eliminate that uncertainty. The research ultimately should have the purpose of generating new information that “advances the understanding of scientific relations or technology.” ¹⁹

A hypothesis must also lead to a systematic investigation or search. That is to say, a hypothesis must be part of “an approach that includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results.” ²⁰ Your hypothesis must solve a defined problem and be tested, and the results, whether they are what was expected or not must also be recorded with conclusions drawn from the tests.

Ensuring that the answers to the questions the hypothesis asks are not available in the existing knowledge base is critical in scientific research. Background research will help to formulate a sound hypothesis and will help to establish the knowledge base necessary for SR&ED work. Once the research has been accomplished one can next identify what variables can be tested.

What if My Hypothesis Is Not Proven to be Correct?

Forming a hypothesis does not mean that what you think will happen will actually happen. (One fairly recent study measuring creativity versus sleep habits has actually found that people are more creative when they are, in fact, tired.)²¹ The hypothesis is meant to predict what a researcher expects to see from the research, but the outcome is to find out whether that hypothesis is either right or wrong. If the outcome disproves the hypothesis, you can use that result as the basis for further research.²² The CRA concedes that most hypotheses will be rejected and more research will need to be performed to obtain an expected outcome. The CRA’s Eligibility of Work for SR&ED Investment Tax Credits Policy notes that “often, [developing and testing a hypothesis] is an iterative process as new uncertainties are recognized and new or modified hypotheses are developed and tested based on the results of the prior iteration.”²³

Summary

Developing a hypothesis can be more complicated than one might initially think; however, the hypothesis is the basis for all the research, experimentation and analysis you and your team will perform. It’s important to note that your hypothesis should not lead to research that is performed by trial and error; there must be a systematic investigation or search performed to solve a scientific or technological uncertainty.

Ensure that your hypothesis has a cause and effect structure that can be tested, and perform comprehensive background research before you develop your hypothesis to ensure it is clear and focused (this will also help to make sure that you do not perform work that has already been done). It is essential to an SR&ED claim that the ensuing testing and experimentation, and generally the research and development performed, is performed to prove or disprove a hypothesis or multiple hypotheses.