Your SR&ED Claim Starts With An Idea

The SR&ED program includes many arcane rules and criteria, which is why I have a job. However, all these criteria can be distilled into one key idea: the hypothesis. A well-formed hypothesis can serve as the cornerstone of your SR&ED claim, supporting eligibility and justifying the costs incurred.

Hypothesis Defined - in the Context of SR&ED

The CRA definition of a hypothesis is:

an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea.

However, the dictionary definition of a hypothesis focuses on the idea being "made on the basis of limited evidence," so why the difference? Digging into the CRA’s definition provides insight into how they view eligibility.

Consistent with known facts:

The CRA’s rationale can be broken down into two parts: what you know and what you know you don’t know. The dictionary definition focuses on what you know. In SR&ED terms, this is the standard practice, which includes past experience, industry knowledge, and publicly available information (the internet, publications). This existing know-how should be the basis for your hypothesis. The second part is knowing what you don’t know. For an SR&ED project, you need to understand the risks associated with your idea. What could go wrong based on your experience? What hurdles stand in your way? Once you can articulate this, the SR&ED portion of your project has started.

Starting point:

The hypothesis is the start of your SR&ED project. If you don’t have a well-formed idea, the CRA will view your project as trial and error. Here again, the common understanding differs from the CRA definition. They view trial and error as trying available solutions without much reasoning or understanding of why something worked or didn’t work. For example, trying various vendor products to see which works best. Therefore, it is essential to articulate why you tried something and what you learned from it.

Prove or disprove:

This underscores that your idea doesn’t have to be successful. In fact, an SR&ED project should include failures. If your idea works on the first try, it’s hard to prove that you were uncertain whether it would work, and you won’t have many costs to claim. If the whole project fails, it’s more likely to be eligible.

A Good Hypothesis Satisfies All The SR&ED Criteria

Technological uncertainty:

Your idea should be based on past experience and seek to push beyond it. Harness standard practices and available knowledge to identify the issue and how you can overcome it. Since your idea exceeds what you already know, you will be uncertain whether it will work—or if it will work at all.

Systematic investigation:

The way to test your hypothesis is to run experiments. Therefore, you need to follow a process akin to the scientific method: test, observe, analyze, and revise. Following logical steps to prove or disprove your hypothesis satisfies this criterion.

Technological advancement:

This is what you learn about your idea as a result of your investigation. If you’ve followed the previous steps, this should occur naturally. Simply articulate whether your hypothesis was correct or incorrect and why.

Documentation:

It's not science unless you write it down. Keeping records of all the key steps including the hypothesis, issues encountered and lessons learned is essential to retaining the knowledge gained and supporting your SR&ED claim.

Summary

The SR&ED program revolves around the concept of a hypothesis—a well-formed idea that serves as the foundation for scientific research and experimental development. A strong hypothesis aligns your work to meet the CRA’s criteria. And you don’t need to succeed; in fact, failures strengthen eligibility. Finally, documenting the process substantiates your claim and embeds the knowledge in your company. By understanding and articulating your hypothesis, you can navigate the complexities of SR&ED and maximize your claim’s potential.