technological advancement SRED

How much of an “advancement” does the SR&ED need to have to be considered a “technological advancement” in SR&ED?

The most important concept of the Scientific Research and Experimental Development (SR&ED) program is the goal of “scientific or technological advancement” and this article intends to clarify the CRA’s definition of technological advancement and clarify the degree of new scientific or new technological knowledge that must be gained to be “SR&ED eligible” in the eyes of the CRA.

Definition of Technological Advancement

The CRA defines scientific or technological advancement as follows: 1

Scientific or technological advancement is the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology. This definition encompasses the definition of scientific advancement, advancement of scientific knowledge and technological advancement. The only difference is that scientific advancement and advancement of scientific knowledge relate to science whereas technological advancement relates to technology.

The phrase “discovery of knowledge” is often misunderstood. Any generation of knowledge must be preceded by the formulation of a hypothesis and subsequent systematic method of investigation which is emphasized in the definition of SR&ED itself. Failure to formulate hypotheses and systematic investigation will result in the work being considered an accidental discovery through Trial and Error, which would disallow the SR&ED claim, as discussed here and here on our blog.

CRA’s Sources for Eligibility of Technological Advancement

There are three locations where we can find more insight regarding this definition: Policy Documents, CRA Forms & Judicial Sources.

Policy Documents

As corroborated within Section 2.1.4 of Eligibility of Work for SR&ED Investment Tax Credits Policy2

The rejection of a hypothesis is advancement because it eliminates a possible solution. By showing why a possible solution will not succeed or will not meet the desired objectives, advancement in science or technology is still possible. In some instances, the project’s objectives might not have been achieved but, in the process, SR&ED was carried out to understand the reasons for the failure.

The same policy also goes on to specify that the creation of new, or the improvement of existing, materials, devices, products or processes alone do not embody technological advancement. Nor is novelty, innovation, uniqueness, feature enhancement, or increased functionality enough to meet this requirement for SR&ED: 3

Technological advancement moves the scientific or technological base of a company to a higher level through an increase in the understanding of technology. In other words, it is a discovery or gain in understanding of technological principles, techniques, and concepts beyond the existing scientific or technological knowledge base.

(For further discussion on the knowledge base of a company, please refer to comprehensive discussions here and here on our blog.)

Technological advancement is primarily measured in relation to the existing knowledge base of the organization undertaking SR&ED itself. This includes its internal resources, as well as the publicly available sources of knowledge to which the organization can be expected to have access. Since the CRA expects claimants to have performed their due diligence and checked for existing solutions to the uncertainty outlined within their hypothesis, this advancement is then considered as a reasonable advance of scientific or technological knowledge within the business environment in which the claimant performed SR&ED. The business environment characteristics include business size, competition, area of industry, and access to technical resources.4

CRA Forms – T661 (Part 2)

The understanding of the principle of technological advancement is mirrored in part two of the T661 form. Line 246 of Section B (Project descriptions) asks “What scientific or technological advancements did you achieve as a result of the work described in Line 244?” 5

technological advancement

Line 246 of the T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim Form

Upon consulting the T4088 Guide used to fill the claim form, the CRA states: 6

It is important to describe what advances you made to your existing technology or knowledge base that enabled you to achieve it (emphasis added).

This sentence confirms our understanding from CRA policy documents, that technological advancement is determined by the existing knowledge base of the claimant before they start their SR&ED project.

Moreover, the CRA goes on to note that “it is the advancement in the underlying science or technology that is important, not how your work advanced your business or business practices.” 7

Judicial Sources

The final sources which affect policy interpretation and enforcement of the principle of technological advancement by the CRA are the Income Tax Act, followed by the litany of court cases and the judgments rendered therein. From such sources, it is clear that advancements need not be ground-breaking leaps in the scientific or technological understanding of the materials, devices, products, or processes under research and development.

This aspect of technological advancement was most importantly put forward by Justice Bowman’s precedent-setting analysis in the case of Northwest Hydraulics: 8

Most scientific research involves gradual, indeed infinitesimal, progress. Spectacular breakthroughs are rare and make up a very small part of the results of SRED in Canada.

This was further bolstered in 6379249 Canada Inc. v. Her Majesty The Queen, when the Honorable Justice Johanne D’Auray compared the English and French versions of section 248 of the ITA, specifically pertaining to technological advancement in the field of experimental development.9

The English version of the definition of SR&ED reads as: 10

Experimental development is work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto.

But, the provision in French reads as follows: 11

le développement expérimental, à savoir les travaux entrepris dans l’intérêt du progrès technologique en vue de la création de nouveaux matériaux, dispositifs, produits ou procédés ou de l’amélioration, même légère, de ceux qui existent.

The Honorable Justice utilized the French version to establish that the work will qualify for SR&ED ITCs if there is a slight improvement to materials, devices, products or processes. Thus, even if the degree of advancement is incredibly slight, it would still qualify for SR&ED ITCs.

Technological Advancement: The Verdict

The CRA provides comprehensive definitions, which set limits and explain the scope of underlying concepts, such as knowledge base, which are important to the determination of advancement. However, such explanations are lacking in the definition of “technological advancement,” particularly in regards to the degree or nature of advancement which would grant technical eligibility to the SR&ED work done.

Ultimately, from the sources utilized by the CRA which are available to the general public, we can surmise that:

“Scientific or technological advancement” is:

  • The generation of information or the discovery of knowledge (through the success or failure of SR&ED objectives); that,
  • Advances (in large or small increments) the understanding of scientific relations/technology within the claimant’s knowledge base (while adjusting to account for their business environment);
  • When reached in keeping with methodologies concurrent with a systematic investigation or search.

This article is based on CRA policy documents available at the date of publication. Please consult the CRA website for the most recent versions of these documents.

Our Comprehensive Guide to SR&ED has a comprehensive analysis of Tax Court of Canada rulings relating to SR&ED, and much, much more. Sign up today!

Do you have any insight into the definition of technological advancement as it is understood by the CRA?
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Show 11 footnotes

  1. Government of Canada. (July 15, 2015.) Scientific or technological advancement / scientific advancement / advancement of scientific knowledge / technological advancement. In SR&ED Glossary. (Accessed: October 2, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#dvncmnt.
  2. Canada Revenue Agency. (April 24, 2015.) Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement? In Eligibility of Work for SR&ED Investment Tax Credits Policy (Chapter 2.1.4). (Accessed: October 2, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_4.
  3. Canada Revenue Agency. (April 24, 2015.) Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement? In Eligibility of Work for SR&ED Investment Tax Credits Policy (Chapter 2.1.4). (Accessed: October 2, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1_4.
  4. Government of Canada. (April 24, 2015.) Step One: Determine if there is SR&ED. In Eligibility of Work for SR&ED Investment Tax Credits Policy (Chapter 2.1). (Accessed: October 2, 2017.) Retrieved September from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits.html#s2_1.
  5. Government of Canada. (November 10, 2015.) T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim. (Accessed: October 2, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t661-scientific-research-experimental-development-expenditures-claim.html.
  6. Canada Revenue Agency. (January 29, 2015.) Section B – Project descriptions. In T4088 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661 (Part 2 – Project information). (Accessed: October 2, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  7. Canada Revenue Agency. (January 29, 2015.) Section B – Project descriptions. In T4088 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661 (Part 2 – Project information).(Accessed: October 2, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html.
  8. Tax Court of Canada. (May 1, 1998.) Northwest Hydraulic Consultants Ltd. v. The Queen. (Accessed: October 2, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/24675/index.do.
  9. Tax Court of Canada. (March 31, 2015.) 6379249 Canada Inc. v. The Queen. (Accessed: October 2, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108839/index.do.
  10. Tax Court of Canada. (March 31, 2015.) 6379249 Canada Inc. v. The Queen. (Accessed: October 2, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108839/index.do.
  11. Tax Court of Canada. (March 31, 2015.) 6379249 Canada Inc. v. The Queen. (Accessed: October 2, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108839/index.do.

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