2021 SR&ED Update: New Eligibility Guidelines

Funding Program - SR&ED

We have been through a lot in the past 2021 and the SR&ED program is no exception. From the guidance on how the CEWS may affect SR&ED at the beginning of the year to the latest update on the SR&ED Form T2SCH31 in December, the CRA kept working to make SR&ED fit the current situation in Canada. However, there is a most important one among all those changes: the new SR&ED eligibility guidelines. First introduced in August 2021, let’s go over all the details you should know and see how it may affect your SR&ED tax credit claim and applications.

The latest updates in CRA’s SR&ED eligibility guidelines include:

What is new in the latest CRA Eligibility SR&ED guidelines?

The previous SR&ED page has long been criticized for using complicated words and terms which make the policies hard to understand. The CRA states that the new SR&ED guidelines update the language and style to provide simpler, more transparent information on whether your project is eligible. The eligibility rules are now simplified to only two sections: “why” and “how”.

The “Why”

The new guidelines clarify that there are three starting points of a eligible SR&ED project:

  • Advancement – work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement;
  • Knowledge base – public resources within your business that combine scientific and technological knowledge;
  • Uncertainty – an insufficiency in the available knowledge base that must be overcome by SR&ED work.

All the contents above must be filled in Line 242 of the Form T661.

The “How”

The new guidelines emphasize using the systematic investigation to carry out SR&ED projects. A typical approach includes the following steps:

  • Carry out the hypothesis – a possible solution to specific problem generated from the current knowledge base;
  • Test the hypothesis through experiments or analyses;
  • Analyze the test results;
  • Draw conclusions.

Your hypothesis may change or evolve during the test, but overall, the process should expand the existing scientific knowledge base. Thereby, all of the contents above are required to be filled in Line 244 of Form T661.

What has been removed?

The new SR&ED guidelines also remove some certain parts from the old one to improve the simplicity. The following three categories are mostly used by applicants before:

  • Two-step methodology of determination
  • Five questions of eligibility
  • SR&ED examples

Two-step Methodology of Determination

The old eligibility page contained a two-step methodology to determine if your work meets the definition of SR&ED, which is:

  • Step One: Determine if there is SR&ED;
  • Step Two: Determine the extent of eligible work.

The two steps are now replaced by the “why” and “how” as described above.

Five Questions of Eligibility

When the CRA went through Step One above, they used the following five questions to determine eligibility:

  • Was there a scientific or a technological uncertainty?
  • Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
  • Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses through experiment or analysis?
  • Was the overall approach undertaken to achieve a scientific or a technological advancement?
  • Was a record of the hypotheses tested and the results kept as the work progressed?

These questions were first introduced in 1998 and incorporated into the SR&ED policies in 2012. The new guidelines have not addressed any reasons why they are suddenly removed, but we can find similar contents in the “why” and “how” categories as well.

SR&ED Examples

Finally, there were six examples on the old SR&ED eligibility page about what was eligible SR&ED work and how to describe it on Form T661. They are all removed and the new guidelines have not provided any similar examples yet.

Summary

Overall, the CRA’s new eligibility guidelines are not that “new” since the core of the SR&ED program remains the same. But now, it is easier for applicants to understand the critical terms, which used to be quite complicated. If you have already decided to apply for SR&ED and want to know more about this update, or if you are still unsure whether your project is eligible for SR&ED, please reach out to our professional SR&ED consulting team for more information.

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