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Just What Exactly Is a Technological Advancement in the SR&ED Program?

27/04/2010


As discussed in our January 27, 2010 blog posting, the first step in taking advantage of the Canada Revenue Agency’s (CRA’s) SR&ED tax credit incentives is to determine if you are performing qualified SR&ED work. But how do you know if you're doing qualified work? The first thing to figure out is whether or not you have performed a technological advancement.

CRA's Information Circular 86-4R3, "Scientific Research and Experimental Development" states that,

"A technological advance is incorporating, by means of experimental development, a characteristic or capability not previously existing or available in standard practice, into a new or existing process or product that  enhances a product's performance. Novelty, uniqueness, or innovation alone do not indicate a technological advance."

But what does this statement actually mean? Let's break down the parts:

By means of experimental development - This part means that you must have done some experimentation. Ask yourself, did we go through several trials to eventually find an answer to our question? Did we need to run a set of experiments, each with specific control variables, in order to establish what variables would have an impact on the outcome? A key distinction indicator of technological advancement is the level of experimentation involved in a project versus the level of routine engineering. What is routine engineering? Routine engineering is performing a task that requires knowledge of engineering science and proper application of engineering principles. In laymen's terms, routine engineering is performing tasks that an engineer would know how to do, thus using their background they would be able to easily solve a problem without much difficulty, and thus without much, if any experimentation of unknowns.

Incorporating a characteristic or capability not previously existing or available in standard practice - This part means that you've advanced the current state of the art by enhancing a characteristic or extending a capability. So ask yourself - do you know what the state of the art is? Does the state of the art include proprietary information held by other businesses? It's not expected that you've done a three year literature review of all the known technologies in the world, however, it is expected that you are an expert in your field of expertise and that you understand what is currently available. That being said, sometimes your competitor might have some proprietary technology that gives them a competitive advantage over your company. If you have to research and experimentation in order to overcome current barriers in your technology in order to meet their current standard then you still could be doing SR&ED because their technology was not available to you in standard practice. A good question to ask yourself when considering this part is - what are the current limitations of the technology that is readily available to me? And, have I attempted to overcome those limitations? If the answer is yes, then you may be performing a technological advance.

Into a new or existing process or product that enhances a product's performance - This part means that either you've created a new process or product , or, you've enhanced a product or process' performance. Sometimes you might develop a new piece of technology that advances the current state of the art. While other times, you might have taken a current product or process and extended its capabilities such that the new enhanced product or process advances the current state of the art.

Novelty, uniqueness, or innovation alone do not indicate a technological advance - This last part means that just because you've created something that doesn't exist, that doesn't mean that you've performed a technological advance. For example, adding features or style changes to a product doesn't necessarily mean it's a technological advance. Similarly if there was no experimental process, or no "unanswerable question" at the beginning of a project then you might not have a technological advancement.

So now that you have a better idea of  what a technological advancement is - are you or your employees performing technological advancements?

If, yes, then you may be performing qualified SR&ED. Eligibility can be determined by your technical SR&ED professional. There may also be tax planning and optimization strategies for owner-managed and smaller businesses. Speaking to a tax and SR&ED advisory professional can help you explore potential tax planning opportunities; which in turn will help optimize your SR&ED claim.

For more information please feel free to contact myself or your local MNP advisor.