Working with you to maximize your SR&ED incentive
In 2012 CRA began a process of updating their SR&ED publications, ostensibly to make them easier to understand. To give them credit where it is due, they have made significant progress.
The prior to December 19, 2012 the main document discussing and setting guidelines as to what constitutes SR&ED was Information Circular (IC) 86-4r3 in May 1994; this was a 15-page document. This was replaced in December 2012 by Eligibility of Work for SR&ED Investment Tax Credits Policy, a 9 page document, which took effect on publication and is much easier to read.
The three criteria for SR&ED eligibility set out in IC86-4r3, namely Technological Advancement (TA), Technological Uncertainty (TU) and Technological Content (TC) remain.
However, instead of asking the taxpayer three questions, focussing on the each of the three criteria separately, CRA will now approach the eligibility decision based on five questions. These are:
1. Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice? (TU)
2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty? (TU, TC)
3. Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses? (TC)
4. Did the process result in a scientific or a technological advancement? (TA)
5. Was a record of the hypotheses tested and the results kept as the work progressed? (TU,TC)
The intersection of the original 3 criteria and the 5 questions used commencing in January 2012 are shown in the above list.
Where do the five questions come from? In 1998 the Tax Court of Canada heard an appeal by Northwest Hydraulics against a CRA decision to disallow their SR&ED claim for five projects. The tax court, in a 30 page decision, found that four of the Taxpayer’s projects were eligible for SR&ED. In this decision Mr. Justice Bowman enunciated five tests for the existence of “systematic investigation” as provided for in the Income Tax Act. These tests form the basis for CRA’s five questions and are taken almost verbatim from this case.
For those interested in reading the complete decision it may be found by following this link: Northwest Hydraulics
The Northwest Hydraulics decision has been cited in most of the Tax Court of Canada decisions on SR&ED and often referred to by CRA to justify disallowing work as not eligible for SR&ED.
CRA has announced that there will be changes to the T-661 form to be published in October 2013 which will reflect the changes to the eligibility criteria. Effective January 1, 2014 this new form will be the only version of the T-661 accepted.
In next week’s blog we will address what companies need to be doing to ensure compliance with these new standards.
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