Software Eligibility for SR&ED

Of the estimated 20,000 claims for SR&ED submitted in 2017 (Source: Amy Siu – Pacific Region Assistant Director – SR&ED for CRA), fully 50% were for software, and at least 95% represented claims for “Experimental Development”. Presumably most of the eligible work was done by engineers using standard engineering techniques.

Companies considering claiming SR&ED are faced with a great deal of ambiguity and uncertainty. As practitioners we understand this. In the past the CRA has issued sector specific guidance for various industries. Practitioners, claimants and the CRA each relied on these guidance documents in the past. However in the last few years all of these were withdrawn.

In 2017 however, the CRA changed direction and issued a new guidance document for software claimants.

While it is good to know that the CRA continues to be committed to the program, the implementation is still difficult because of the subjectivity of the definition. Claimants must be able to answer “YES” to each of the 5 Questions.

Claimants must be able to answer “YES” to each of the 5 Questions

The method to establish if there is SR&ED involves answering five
questions.
1. Was there a scientific or a technological uncertainty?
2. Did the effort involve formulating hypotheses specifically
aimed at reducing or eliminating that uncertainty?
3. Was the overall approach adopted consistent with a
systematic investigation or search, including formulating
and testing the hypotheses by experiment or analysis?
4. Was the overall approach for the purpose of achieving a
scientific or a technological advancement?
5. Was a record of the hypotheses tested and the results
kept as the work progressed?
Remember: “It is determined that there is SR&ED if the answer to all
five questions is ‘YES’.”
These questions were laid out in the precedent-setting Northwest Hydraulics Case from 1998. Unfortunately the terminology seems more in keeping with the “scientific method” as opposed to an engineering approach.
Since most claimants hire engineers rather than scientists, this can be a problem. For the most part engineers don’t speak about “hypotheses” – even though they actually develop them when doing experimental development.
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As practitioners our first task is to determine whether there was a “technological uncertainty”. This isn’t necessarily the same thing as a “technical challenge” – although it may be (I am reminded of the question: How many angels can dance on the head of a pin?). We do this by questioning engineers who most often would rather be doing something else instead of playing word games.
Also we should keep in mind that most engineers are practical people who believe that engineering – if done right – can solve most technical problems. What’s more they typically don’t like to talk about their failures.
As SR&ED practitioners we love talking about failures – because that is often where the SR&ED is. Engineers on the other hand, won’t always admit when things were hard. For many it is simply a matter of pride.
If all of that isn’t hard enough, occasionally we run into Research Technology Associates (aka “RTAs”) who say things like:
“If you are using standard engineering tools and methodologies, you can’t be doing eligible R&D.”
While clearly some RTAs are simply wrong, the process can be frustrating if claimants get off on the wrong track at the outset. Unfortunately there are pockets of incompetence spread throughout the regions. While the CRA does it’s best to identify problems, it can be challenging in a unionized environment, once incompetent staff have achieved a foothold.
The good news for claimants in the Pacific Region, in our experience CRA specialists here are relatively competent and reasonable.