Technological Advancement: The Core of SR&ED
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. *** |
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:
Scientific or technological advancement is the generation or discovery of knowledge that advances the understanding of science or technology.1
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 the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives:
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. The type of knowledge in this context is conceptual knowledge, such as theories or prediction models, rather than just factual knowledge, such as data or measurements.2
The same policy also goes on to specify that in order for scientific advancement to occur, there must first be scientific uncertainty:
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.3
(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. The CRA defines knowledge in the SR&ED Glossary as:
Technological or scientific knowledge is the understanding of technology or science.4
The CRA defines the knowledge base as:
Scientific or technological knowledge base consists of the combined knowledge of the resources within the business and those sources that are reasonably available publicly.
The resources within the business include both:
- its personnel’s scientific or technological knowledge, education, training, and experience;
- its technical capabilities represented by its current products, techniques, practices, and methodologies (for example, trade secrets and intellectual property).
Publicly available sources could include:
- scientific papers;
- journals;
- textbooks;
- internet-based information sources;
- expertise accessible to the business (for example, through suppliers, recruiting employees or hiring consultants or contractors).
The scientific or technological knowledge base may vary from business to business because:
- their internal resources are different;
- some of the public sources of knowledge may not be reasonably available to all businesses.5
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.
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 or attempt to achieve as a result of the work described in Line 244?” 6
Upon consulting the T4088 Guide used to fill the claim form, the CRA states:
it is important to describe what advances you made to your existing scientific or technological knowledge base that enabled you to achieve your goals. (emphasis added).7
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.” 8
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 Hydraulic Consultants Ltd. v. The Queen (1998):
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.9
This was further bolstered in the case of CRL Engineering Ltd. v. The Queen (2019) when the Honorable Justice Guy R. Smith stated:
There is necessarily a fine line between a “technological advancement” or “incremental improvements” to existing materials, devices, products or processes. This suggests that the Appellant need not prove that its activities were novel, but rather that there were incremental improvements to existing technology.10
The Honorable Justice utilized the case of Northwest Hydraulics to establish that the work will qualify for SR&ED ITCs if there is an incremental 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 or discovery of knowledge (through the success or failure of SR&ED objectives); that,
- Advances (in large or small increments) the understanding of science or 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.