The CRA asks five questions to determine whether a project meets the SR&ED program criteria:

1. "Was there a scientific or a technological uncertainty that could not be removed by standard practice/engineering?"

Basically this means that you've advanced the current state of technology by enhancing a characteristic or extending a capability. An example could be an automobile parts manufacturer who does not yet have the technology to increase volume in order to meet customer demands. The manufacturer will have to do some development and research to advance the technology and will be able to claim that time through the SR&ED program.

2. "Did the effort involve formulating a hypothesis specifically aimed at reducing or eliminating the uncertainty?"

A hypothesis is defined as "a proposed explanation made on the basis of limited evidence as a starting point for further investigation." For the purposes of SR&ED, a hypothesis is simply referring to how you will attempt to resolve the technological unknowns identified before the experimentation begins. For example, an automobile parts manufacturer could have discovered a new way of advancing technology through analyzing several prototypes and continually testing the original hypothesis.

3. "Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?"

If you have a confused look on your face after reading this question, you are not alone. The CRA is trying to understand whether you went through a well thought out process to identify the advancement you needed to achieve; you identified challenges that were associated with achieving that advancement; and that you followed through in an iterative process until you arrived at your hypothetical outcome or proved that it could not be achieved.

4. "Did the process result in a scientific or technological advancement?"

You've advanced the current state of technology by enhancing a characteristic or extending a capability. In your research and experimentation efforts, did you find an existing solution that solved your challenges? If that's the case, then your project most likely does not qualify for SR&ED.

The CRA is looking for the result of your iterative process and how that has advanced the knowledge base within your company. Keep in mind that this advancement needs to be on a technical level and not a business one. So, it can't just address a 'market demand' knowledge gap, but a technical one.

Didn't achieve your technological objective due to challenges you could not overcome? This can qualify for SR&ED as this failure has advanced your technical knowledge and you know where not to start in your next iteration of your testing.

5. "Was a record of the hypothesis tested and results kept as the work progressed?

Documentation needs to be contemporaneous. This means that it was "created at the time when the SR&ED work was done and produced as a result of performing such work." It is expected that all work is documented. You must clearly demonstrate why each major element is required and how each fits into the project. We discuss this further in the "What Do I Have to Document" section of this Guide.

Take a look at the CRA's Eligibility of Work for SR&ED Investment Tax Credits Policy here.