Date: August 13, 2021

This section provides historical and background information related to the guidelines and criteria used to determine whether the work carried out by a taxpayer meets the definition of SR&ED in the Income Tax Act. For a history of the definition of SR&ED in the Act and how it has changed over time, see a brief history of the definition of SR&ED.

Before 1985, guidance on eligibility of work, in terms of whether it met the previous Income Tax Regulations definition of “applied or basic research” or “development”, was provided in the form of Interpretation Bulletin IT-439. Based on the feedback received from taxpayers, the Department of Finance recognized that the guidance provided in IT-439 was insufficient to explain the meaning of eligible “research” and “development.” The May 1985 Budget Papers issued by the Department of Finance stated that the Department would amend the definition of “scientific research” that existed at that time in the Regulations to include the term “experimental development.” The introduction of the phrase “experimental development” was meant to confirm that “projects involving only routine engineering or routine development” would be excluded ^[1]. Thus, the term “Experimental development” was used to clarify the broader idea of “development”. Only development activities associated with “experimental development” would be eligible.

On March 4, 1986, responding to Revenue Canada's request for clarification of the meaning of the term “experimental development”, the Department of Finance confirmed that:

“With respect to the general guidelines, this department is in basic agreement with the approach being taken, namely that to qualify for the research and development tax incentives, an activity must embody some scientific or technological advancement, have some elements of scientific or technological uncertainty, and be carried out in a systematic and organized fashion. In other words, the research or development activity will advance our understanding of scientific or technological relationships. In our view, these criteria capture the spirit and intent of the legislation.”

In 1986, Information Circular 86-4 Scientific Research and Experimental Development was issued. It was a guideline developed by industry leaders and Revenue Canada on how to apply the term "Experimental Development and Scientific Research". This document described essential tests (namely the criteria of scientific or technological advancement, scientific or technological uncertainty, and scientific and technical content) that had to be met before work could be considered scientific research and experimental development. The three criteria became a tool on how to apply the term Experimental Development, especially in an industrial context, and a cornerstone for identifying whether work met the definition of SR&ED in the Act. Although revisions of Information Circular 86-4 were issued (the latest being IC 86-4R3 in 1994), the three criteria remained intact.

Although there have been numerous changes to the legislation, the clarification, made in 1992 to the of the earlier definition of experimental development is of particular importance to the application of eligibility requirements. This clarification was intended to focus on the purpose of experimental development. It confirmed that “[…] development work that is experimental in nature and that is undertaken for the purpose of achieving technological advancement for the purpose of creating or improving existing materials, qualifies, but development work that is routine in nature does not qualify…” ^[2].

In 1998, Judge Bowman issued a decision in Northwest Hydraulic Consultants Limited v. The Queen based on his understanding of the concepts laid out in IC 86-4R3 ^[3]. He set out an approach to determine whether the claimed work met the definition of SR&ED. His approach provided an understanding of the relationship between the three criteria and the legislative definition of SR&ED. Subsequent jurisprudence has reinforced the approach set out by Judge Bowman. This approach formed the basis of the five questions used to determine if there is SR&ED, as described in the Eligibility of Work for SR&ED Investment Tax Credits Policy (first published in 2012, revised in 2015, and archived in 2021).

In 2020, the SR&ED program set priorities to modernize the program and improve the claimant experience. This included a plan to replace the Eligibility of Work for SR&ED Investment Tax Credits Policy, "the policy", with updated and simplified information for claimants, including new Guidelines on the Eligibility of Work for SR&ED Tax Incentives, "the guidelines".

Published in summer 2021, the guidelines present two requirements (the "How" and the "Why" requirements) that replace the previously used five questions. Both the two requirements and the five questions are derived from the definition of SR&ED in subsection 248(1) of the Act, which did not change. The guidelines provide a common language for claimants and CRA officials to use when discussing whether the work meets the definition of SR&ED in the Act.

References

[1] Securing Economic Renewal Budget Papers tabled in the House of Commons by the Honourable Michael H. Wilson, Minister of Finance, May 23, 1985

[2] Government of Canada News Release 92-088, December 2, 1992

[3] Northwest Hydraulic Consultants Limited v. The Queen, 98 D.T.C. 1839, [1998] 3 C.T.C. 2520 (Tax Court of Canada)

Appendix A: Revisions

The following are the explanation of changes to A brief history of the guidance on the eligibility of work:

1. The last two paragraphs were added to explain that the 2015 Eligibility of Work for SR&ED Investment Tax Credits Policy was replaced with the 2021 Guidelines on the Eligibility of Work for SR&ED Tax Incentives (the guidelines).
2. The guidelines contain updated, simplified information and present the two requirements (the “How” and “Why”) to determine if there is SR&ED. The two requirements are derived from the definition of SR&ED in subsection 248(1) of the Income Tax Act, which did not change.