How is an SR&ED project defined?
When filing an SR&ED tax credit claim with the Canada Revenue Agency (CRA) the work claimed is structured as a “projects”. The claimant defines the projects undertaken, and the activities within a project. An intuitive definition of a project is used, and boundary areas are subject to interpretation.
Project start and end dates are often difficult to determine. Eligibility of routine support activities for a project is frequently questioned. As well, large projects involving teams or multiple teams of researchers can be considered “over aggregated”. CRA has requested work be broken into more easily digestible units, each unit being an SR&ED project. Each of these issues presents considerable difficulties both for tax preparers and CRA auditors as each attempts to fairly assess the overall eligibility of work for tax credits. A fundamental problem is that industrial research projects can encompass a broader set of activities than CRA is able to support.
A steering committee composed of industry sector representatives and CRA have now released a consensus document describing the principles that will assist in the application of IC 86-4 as it relates to the definition of an SR&ED project. The primary reason for issuing this paper is to develop a common level of understanding so work is reviewed at a proper level of aggregation to avoid projects being broken down in such a way that ineligibility is inadvertently lost.
There are three criteria necessary for any project: scientific and/or technological advancement, uncertainty, and content. A project is considered to be a set of “interrelated activities that collectively are necessary for the attempt to achieve the specific advances(s) defined for the project, are required to overcome uncertainty, and are pursued through a systematic investigation by means of experiment or analysis performed by qualified individuals.”
While the above definition provides a clear starting point, the CRA document goes on to provide guiding principles in many difficult areas. Of particular importance to many claimants are the following:
- Projects should be assessed in their entirety, rather than broken up into their constituent parts.
- CRA will review the claimants process for preparing their SR&ED claims. How is SR&ED differentiated from non-eligible work? Who makes these decision and what is their experience and credentials for making the decision? What is their level of understanding and experience with the SR&ED claims preparation process?
- Projects tend to come in two flavours. Those that are distinct and well defined units of work, and those that are long-term multi-year projects that evolve in their goals as time progresses. In these later type of projects CRA recognizes that many activities may be routine, that these activities do not form SR&ED projects by themselves, and that they are eligible due to their contribution to the overall project.
- A project start point is defined as the point at which the scientific and/or technological objectives could be defined. Where unanticipated difficulties are encountered in otherwise routine work the project would commence when the difficulties are recognized. However, prior work that is integral to the SR&ED process can still qualify.
- A project end is defined as when activities associated with the resolution of uncertainty is complete, and it has been demonstrated that project objectives have been met.
The Strategy
Work on developing a process for identifying and tracking projects. Be prepared to discuss with CRA how you identify eligible SR&ED work and differentiate it from standard practice. In preparing your claim define projects at the highest level.
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