The present-day Scientific Research and Experimental Development (SR&ED) tax credit program was created by the Income Tax Act (ITA) in 1986 as a way to incentivize Canadian businesses into conducting research and development projects within Canada. The SR&ED program is administered by subsection 248(1) of the ITA, and on occasion, the Tax Court of Canada conducts cases on key matters to clarify eligibility criteria.
Technological uncertainty exists when a business doesn’t have the know-how, capabilities or current technology to reach achieve their technical objectives. When an eligible business is preparing SR&ED claims, it is vital that their project is claimed at the highest level particularly in the presence of SR&ED technological uncertainties and complex systems.
Recently, the Tax Court of Canada released its decision in the Buhler Versatile Inc. vs. His Majesty the King (2023 TCC 18), and Justice Wong’s provided positive implications for technology system uncertainty that claimants should consider when preparing SR&ED claims.
SR&ED Tax Credit System Uncertainty: Buhler Versatile Inc vs His Majesty the King Court Case Insights
Some technology and system uncertainty insights from the Buhler Versatile Inc vs His Majesty the King court case includes the following:
- Although a technological uncertainty must be identified at the outset, identifying new technological uncertainties along the way, and using the scientific method (including intuition, creativity, and sometimes genius) to uncover, recognize, and resolve them is an integral part of SR&ED.
- It is the view that the technological uncertainty in this SR&ED case fits squarely under the description of a system uncertainty. In other words, the integration of non-trivial combinations of established (well-known) technologies and principles carried a major element of technological uncertainty. When all the individual parts were combined, their individual uncertainties were merged into a system uncertainty and the system uncertainty was the entire tractor.
- It did not always know whether a specific theory would successfully resolve a particular issue, but it always knew why it was testing that theory. With the technological uncertainty being a system uncertainty (i.e., a merging of individual uncertainties) in this instance, the various hypotheses formulated would logically vary in magnitude and relative importance to the system all together.
- While the techniques and testing methods were known, the resolution of this system uncertainty was not reasonably predictable, as can be seen by the number of directions the appellant went in its efforts.
Additional Insights from This SR&ED Court Case:
- Eligible applicants should structure their SR&ED claims at the highest level to capture project eligibility and associated expenditures, which may involve system uncertainty.
- The Court awarded eligible expenditures on only one of the three projects at issue, which emphasizes the importance of clearly delineating and identifying expenditures on a per project basis.
Learn More About the SR&ED Tax Credit Program
The SR&ED tax credit program provides more than $3 billion in tax incentives to over 20,000 claimants annually in Canada, as it is the country’s largest single source of federal support which incentivizes business-led research and development projects.
The Government of Canada offers a wide range of research and development tax credit and grant programs. Although the largest such tax credit program is SR&ED, the largest grant program is the Industrial Research Assistance Program (IRAP). To learn the difference between these two programs and if your business should apply for each, download our free IRAP vs. SR&ED slide deck.