The question client’s often find hard to answer in an SR&ED review is: “What evidence do you have to support your claim?” We don’t want a client to face this question unprepared.
The SR&ED program does not subsidize the cost of developing, for example, a new product. They subsidize the cost of any and all work done within the development of the product, when that work is done to solve a significant obstacle. The obstacle must be technological in nature, which excludes such things as style, which doesn’t affect whether the product works or not. Technology refers to the knowledge that enables us to make useful tools and processes. A lack of know-how that prevents you from achieving the utility or performance etc. you want out of your new product or process points to a technological obstacle.
Let’s say you had an idea for a new circular saw blade that will cut faster than existing blades. Presumably you are in the business of manufacturing tools, so creating a new pattern for a circular saw blade and producing it are objectives you are certain you can meet. If you go ahead and produce a new pattern and later place the prototype in front of CRA as evidence of SR&ED, you will soon be told it is insufficient evidence. Despite any advanced properties, or superior qualities, the blade alone is only evidence of what your company is capable of producing. Additionally, a patent only establishes that you are the rightful owner of the pattern. Despite common sense that supports your claim that experimental development took place, the evidence on it’s own should argue 5 things:
- With all the information and expertise available to your company, you worried at some point if you were going to be able to pull it off, or you weren’t completely certain of the best way from all the options.
- You had ideas how you might pull it off, but you took some time to try a few things first.
- You didn’t start trying things willy-nilly. You took steps when you tried things, and you made sure to check or validate your results as you went along.
- If you found an answer, you can express how it is valuable to know it. You might say “I’m glad I won’t make that mistake again”, or “I’ve got a leg-up on the competition!”. And of course you can explain why.
- You wrote down your ideas and kept track of the things you tried as you did the work. Not what you did every minute, but a description of how you went about trying things, and what you found out along the way.
So, back to the example of the new saw blade. An advance could be a change in the material the blade is made from, it could be an improved way of stamping out the shapes, it could be a blade that stays sharp longer, or sharpens itself while you cut, or prevents kick-back. All of these are advances in the product, but none argue that SR&ED activities took place. But if you document how one day you noticed how some materials tend to kick back, but others don’t. And you document that it seemed when the blade was missing a few teeth it kicked back less, and that made you think a blade with gaps in the teeth could help prevent kick-back. And then you make a plan to find out if this is true by making blades with gaps and testing them. And then you follow the plan and record your results, and can describe what you think is happening… Well then you have an SR&ED claim.
And here’s the kicker. If you wanted to build a new saw blade for any reason, if you planned to do it as an SR&ED project instead of just throwing money and resources at it, the Government of Canada will probably be happy to pay a nice chunk of the development costs.