Technological Objectives in SR&ED: Past CRA Definitions and Our “Working” Definition
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Clear definitions are integral to successful SR&ED policies
– and applications.
The Scientific Research and Experimental Development (SR&ED) Investment Tax Credit (ITC) program has undergone significant restructuring in recent years in hopes of improving the application process and accessibility to SR&ED ITCs for small and medium enterprises (SMEs). While there are many benefits to the program changes that occurred in 2012, including the provision of the SR&ED glossary, there are some terms that remain undefined. To further complicate the issue, terms used within the administration of the SR&ED program, including technological objectives, are not static – they evolve over time with changes to program administration, interpretation, etc. These changes are confusing for SR&ED applicants and can cause unnecessary additional work for Research and Technology Advisors (RTAs) at the Canada Revenue Agency (CRA), who must correct misunderstandings.
In this article, we discuss the term scientific or technological objective, examining the historical and current use of the term. Based on the information available, we propose a definition for the CRA to include in the next revision of the SR&ED glossary.
A Historical Perspective: Scientific or Technological Objective
In the now-cancelled IC97-1 (released in February 1997), the CRA references to “technological objectives” and “technological problems” (emphasis added):
[…] the taxpayer must define the objective or objectives of the SR&ED project in scientific or technological terms stating clearly the advance or advances to be sought […]
(Section 2: SR&ED Project Definition, IC97-1)
[…] the technological problem must be clearly posed, the intended technological advancement must be specific and verifiable, experimentation must be conducted, a systematic testing protocol must be established to test for the achievement of the objectives, quantitative or objective measurements must be made, and technological conclusions must be drawn.1
(Section 3.3: The scientific and technical content criterion, IC97-1)
These excerpts indicated that a must define their technological objective to demonstrate that SR&ED eligible work has occurred; however, a clear definition of the term itself is not provided.
Current Perspective: Scientific or Technological Objective
The updated versions of the Eligibility of Work for SR&ED Investment Tax Credits Policy (April 2015) and the SR&ED Glossary (July 2015) fail to provide applicants and consultants with a clear explanation of technological objective. It is, however, referenced 23 times (emphasis added):
- “[The private company’s] research objective was to gain knowledge of the properties semiconductors, […]” – Section 1.2.2
- “Scientific or technological uncertainty means 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.” – Section 2.1.1
- “Technological uncertainty exists when you don’t know whether you can achieve a certain result or objective or how to achieve it based on generally available scientific or technological knowledge or experience.” – Section 2.1.1, Example 1
- “There was technological uncertainty because you did not know whether you could achieve a specific result or objective or how to achieve it based on generally available scientific or technological knowledge or experience.” – Section 2.1.1, Example 1
- “It is important to recognize that this question relates to more than simply identifying that how to achieve the objectives is unknown.” – Section 2.1.1
- “Sometimes there is little doubt that a product or process can be developed when cost targets are no barrier. In commercial reality, however, a reasonable cost target is always an objective.” – Section 2.1.1
- “To achieve your project objective (a room-temperature carbon monoxide remover), you have to develop a new inexpensive process.” – Section 2.1.1, Example 3
- “The cost target—a business or commercial objective—by itself does not create a technological uncertainty.” – Section 2.1.1, Example 3
- “Development work is based on the application of the existing scientific or technological knowledge base, such as directly adapting a known engineering or technological practice to a new situation, where there is reasonable certainty of meeting the technological objectives.” – Section 2.1.1
- “Specifically, you might be directly adapting a known engineering or technological practice to a new situation when you are reasonably certain that the known technology or practice will achieve the desired objective.” – Section 2.1.1, Example 4
- “This means that the objectives of the SR&ED work, as well as the indicators and measures to be used to determine if those objectives have been met, must be clearly stated at an early stage in the work’s evolution.” – Section 2.1.3
- “This means that the objectives of the SR&ED work, as well as the indicators and measures to be used to determine if those objectives have been met, must be clearly stated at an early stage in the work’s evolution.” – Section 2.1.3
- “The objective in such a case is to resolve a functional problem rather than to address a problem in the underlying technology that may have caused this functional problem.” – Section 2.1.3
- “By showing why a possible solution will not succeed or will not meet the desired objectives, advancement in science or technology is still possible.” – Section 2.1.4
- “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.” – Section 2.1.3
- “Hence, scientific or technological advancement can be achieved even if the project’s objectives are not met.” – Section 2.1.3
- “You could claim you were unsure about how to achieve your objectives because you did not know which powder to use and what level you needed to use it at to make the peeler.” – Section 2.1.4, Example 5
- “Process optimization and cost reduction are examples of process development efforts with the objectives of improved efficiencies, better output quality, or financial or strategic advantages.” – Section 2.1.4
- “In other words, it is not the overall commercial objective but rather what is actually occurring at a technical level that is relevant.” – Section 3.1
- “If there is SR&ED, the next step is to assess the extent of the work (section 2.2) and the associated expenditures against the objectives of the SR&ED project.” – Section 3.1
- “The start of the SR&ED project is identified as the point at which the scientific or technological uncertainties are identified, resulting in the definition of scientific or technological objectives, as opposed to business or commercial objectives.” – Section 3.3
- “The start of the SR&ED project is identified as the point at which the scientific or technological uncertainties are identified, resulting in the definition of scientific or technological objectives, as opposed to business or commercial objectives.” – Section 3.3
- “Work that is conducted as part of standard business practice and is not needed to define the scientific or technological objectives is not part of the SR&ED project.” – Section 3.3 2
The concept of “objectives” is further referenced in three SR&ED Glossary definitions:
- Experimental Production: Experimental production is defined as the production output of experimental development that is required to verify whether the objectives of the SR&ED work have been met or if a technological advancement is achievable. The purpose of the production run, in which the output is experimental production, is to evaluate the technical aspects of the SR&ED project.
- Production Run: In a commercial environment, companies run processes and equipment for certain periods of time in order to achieve specific objectives. […]
- Scientific or Technological Uncertainty: Scientific or technological uncertainty means 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. […]3
It is important to recognize that this question relates to more than simply identifying that the required method to achieve the objectives is unknown. One must be able to specifically identify what is creating the uncertainty – what is lacking in the scientific or technological knowledge base. This is necessary to formulate an appropriate hypothesis for further investigation.4
So while the term is often used, it does not appear in the SR&ED glossary, and it is inadequately defined in the Eligibility of Work for SR&ED Investment Tax Credits Policy.
Consolidating The Evidence: Scientific or Technological Objective
We can deconstruct the information available to us in order to propose a definition for the concept of a scientific or technological objective.
First, the dictionary definition of “objective” is “something you are trying to do or achieve: a goal or purpose”.5
Second, as mentioned in the Eligibility of Work for SR&ED Investment Tax Credits Policy, it is important to note that the focus is on science or technology, not on business objectives:
The start of the SR&ED project is identified as the point at which the scientific or technological uncertainties are identified, resulting in the definition of scientific or technological objectives, as opposed to business or commercial objectives.6
Third, the CRA makes the following clear in their definition of scientific or technological advancement and scientific or technological uncertainty:
The only difference is that scientific advancement and advancement of scientific knowledge relate to science whereas technological advancement relates to technology.
The only difference is that scientific uncertainty relates to science whereas technological uncertainty and technological obstacle relate to technology.7
A Proposed Definition: Scientific or Technological Objective
With the above factors in mind, we have put forward the following definition of technological objective:
- The goal or purpose of a project
- Related to a specific field of science or technology
- That arises from the identification of scientific or technological uncertainties
… where the only difference is that
- The scientific objective relates to science whereas technological objectives relates to technology.
A Final Caveat: Dealing With Misperceptions
As mentioned in the Eligibility of Work for SR&ED Investment Tax Credits Policy, the objectives can be treated as a hypothesis-to-be-tested:
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. Hence, scientific or technological advancement can be achieved even if the project’s objectives are not met .8
The challenge? The term “project objective” can confuse applicants, as there are two types of projects and multiple types of objectives. In most business environments, a “project objective” refers to the business or commercial objectives. The objectives may be features or functionality, not scientific or technological objectives.
Our proposed change to this text is as follows:
By showing why a possible solution will not succeed or will not meet the desired scientific or technological objectives, advancement in science or technology is still possible. In some instances, the project’s scientific or technological objectives might not have been achieved but, in the process, SR&ED was carried out to understand the reasons for the failure. Hence, scientific or technological advancement can be achieved even if the SR&ED project’s scientific or technological objectives are not met.
This excerpt could draw the line between technological uncertainties, objectives, and advancement. With this passage, we believe that the CRA could clearly indicate that an SR&ED project seeks to address a scientific or technological uncertainty through the advancement of knowledge in the pursuit of a scientific or technological objective. The above excerpt clarifies that a scientific or technological objective need not be achieved, while scientific or technological advancement (i.e. moving beyond the publicly available knowledge base) must be achieved for a project to be eligible for SR&ED ITCs.
(Finally: If you are at the CRA and reading this article, ask yourself the following: as the program focus narrows to all that which is “scientific or technological,” is the intent of the program being met? Or have these changes limited the scope of the program beyond the original intent? We’re working to align the vocabulary and definitions – but take a look at what has happened by doing so. It is extremely restrictive for most organizations.)
If you can’t define it… how can you defend it?
In summary, the scientific or technological objectives provide the direction for an SR&ED project. Without a clearly defined objective, the project will appear disorganized and haphazard. In order to submit a strong application, it is important for the applicant to work around this definition oversight and put forward a clear description of the scientific or technological objective when describing their work to the CRA.