Four things to know about the new SR&ED eligibility guidelines

Knowing the “why” and “how” behind your SR&ED project is key to meeting changing CRA requirements.

In brief:

• The CRA’s approach to evaluating SR&ED eligibility has evolved.
• These changes are an effort to enable claimants to better apply the law to projects and clarify their eligibility.
• While most determinants remain the same, claimants should focus on adapting descriptions to answer the “why” and “how requirements”.

Four things to know about the new SR&ED eligibility guideline

 Getting clear on the Canada Revenue Agency’s (CRA’s) approach to SR&ED eligibility and aligning your project information accordingly doesn’t just save time. It can also help make the process of earning tax credits more efficient and predictable. This year’s policy refresh on SR&ED eligibility doesn't constitute wholesale change - but it does reflect key nuances that anyone working to navigate the program effectively should keep in mind::

1.  The CRA’s approach to evaluating SR&ED eligibility has evolved

Launched in 2021, the new policy introduces eligibility requirements that represent a marked change in the way the CRA evaluates the eligibility of the work claimed. The eligibility rules themselves remain the same and continue to be based on the Income Tax Act’s existing definition of SR&ED, which has remained relatively untouched for decades.

Remember: the CRA doesn’t create the law that governs the SR&ED program, but it is tasked with administering it. In this most recent policy document, the CRA moves away from the five-question approach that’s been used to determine eligibility since 2012, distilling the requirements down to two:

• Why was the work done? This requirement ties into the purpose elements in the definition of SR&ED. To qualify, work must have been done to advance scientific knowledge, or for the purpose of technical advancement.
• How was the work done? This requirement reflects the “systematic investigation or search” component of the SR&ED definition.
  SR&ED glossary

2.  The language and style of the policy have been updated

The CRA’s new policy represents a change in language and style meant to better align with the legislation. In addition, the new policy is meant to simplify and clarify how to apply the law to your projects, so you can better determine whether your work qualifies. Instead of going through the previous, somewhat daunting, five questions that used language like “scientific method” and ”testing of hypotheses” that were foreign terms for many industries, the new policy boils the eligibility rules down to the two “why” and “how” requirements.

3.  The T661 form remains the same

There was some speculation that the T661 form would evolve to reduce the three main blocks of text in the project descriptions down to two. However, the CRA has confirmed there is no plan to change the form in the near future. Other documents, like the CRA’s Guide to Form T661 and claim review manuals, have been updated to reflect the change to the “why” and “how” requirements. Claimants can expect the CRA’s Research and Technology Advisors will no longer refer to the five questions in their reviews or eligibility reports. 

4.  Claimants may need to rethink SR&ED project descriptions

This is a good time to reflect on how you prepare SR&ED project descriptions in light of the simplified requirements. You’ll want to ensure your project descriptions clearly explain why you wanted to do the work, as well as why existing technology, methods and approaches couldn’t solve the problem. This is often an area where claimants’ project descriptions fall short. It’s up to you to help the CRA understand the limitations of existing knowledge or technology and effectively describe why you can’t rely on them to solve a given problem.

To show your work meets the new how requirement, you’ll also need to demonstrate it constituted a systematic investigation or search in an eligible field of science. Showing that you developed a clear plan, and carried it out with intention, is important. To qualify, projects need rigor. They cannot be based on trial and error.

Claimants tend to focus project descriptions on the new process, product or functionality they ultimately achieved. That said, the CRA is far more interested in understanding the steps you took to solve the technological problems faced along the way. Keeping good documentation of the entire process you followed is critical.

What’s the key takeaway?

The CRA’s new eligibility guidelines aren’t really “‘new.” Eligibility determinations are unlikely to change. But ensuring you understand the nuances of the policy — and adapting your own SR&ED processes accordingly — might just result in a change for the better.