Computer Software and the Technological Advancement Criterion
In the article entitled Revised Guidelines for Software Development Projects, we discussed generally the technical guidelines of claims as related to software projects. In this article we will expand on one of the three necessary eligibility criteria, namely that of Technological Advancement. Subsection 248(1) of the Income Tax Act, states: “Scientific Research and Experimental Development means systematic investigation or search that is carried out in a field of Science or Technology by means of experiment or analysis and that is
(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view, (b)applied research, namely, work undertaken for the advancement of scientific knowledge with a specific application in view, or (c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto, …”.
Each of the three components of the definition requires that a scientific or technological advancement must be sought. In general, an advancement is the discovery of new scientific or technological knowledge that increases (the taxpayer’s) understanding of scientific relations or technologies. It is important to note that simply creating new software products or processes is not, in and of itself, technological advancement. It is HOW (by what process) the advancement was achieved that is important. In this case, it must be through a process of experimentation or analysis where there is technological uncertainty. It is key to understand the difference.
In our experience, one area where software claims are denied, is because they have been submitted on the basis of having developed a new software product or a software product with new functionality or features. To make the case, they should have been submitted on the basis of achieving a technological advancement which was embodied in the new software product. It is up to the claimant to identify the difference. Fortunately, the new Information Circular (I.C. 97-1) provides some useful examples of technological advancements (which have been paraphrased below):
1. Development of a new approach to perform text searches in large distributed data bases. (Advances knowledge on text search methods).
2. Research into possible image compression approaches to solve a specific technological uncertainty. None were found. The claimant then developed, tested and discarded several compression algorithms. (Advances knowledge on compression approaches. Note this meets the criterion even though they failed).
3. Development of a set of methods for bridging multiple teleprocessing monitors and data base management system environments while ensuring data synchronization. (Advances knowledge of processing in a complex environment).
It also lists some examples which are NOT technological advancements as stated (again paraphrased):
1. Development of a new software product for a retail environment including algorithms for the calculation of various applicable taxes. (Improved product functionality, not technological advancement).
2. The claimant used a new operating system whose features represented technological advancement for the company compared to another operating system previously used. (Use of, or learning about existing technology is not an advancement).
3. Development of a new tape driver operating under UNIX. (Standard and routine programming for an experienced programmer).
4. Development of a new software system for computer aided instruction embodying innovative object oriented programming concepts and operating in a heterogeneous RISC workstation/PC environment. (On review of the claim, it was found that the development was achieved using industry available application programming tools. Additionally, the field of computer-aided instruction is in an ineligible field of the social sciences).
The Strategy
Since technological advancement is one of the MUST criteria, very carefully identify the advancements you are seeking so as to be sure they are not simply routine development, use of existing tools, improved product features or are activities in an ineligible field of work. Consider the advice of a knowledgeable consultant.
