Common Mistakes New Claimants Make in their SR&ED Technical Narratives
Updated to Reflect New Policies (2022)*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. *** |
Throughout the years we have helped a variety of taxpayers with their Scientific Research and Experimental Development (SR&ED) technical narratives. We have noticed common mistakes claimants, especially new claimants, make in their narratives. This post will explain some of those mistakes and provide guidance on ways to avoid making the same mistakes in the future.
Line 200 – SR&ED Title
The first mistake we often see in the SR&ED technical narratives is in the title. You are limited to 60 characters and there is no exception to this rule. We suggest making those characters count by avoiding using references to business projects and ensuring that the title refers to the technological work which was conducted.
For more information please see our post devoted to SR&ED titles in SR&ED Project Titles: First Impressions Matter (Line 200).
Line 242 – SR&ED Technological Uncertainties
Line 242 is another section we often see mistakes in SR&ED technical narratives. This section deals with technological uncertainties. The T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661 explains:
Line 242 – What scientific or technological uncertainties did you attempt to overcome?
(Maximum 350 words)Describe the scientific or technological uncertainty you encountered that led you to do the SR&ED. Scientific or technological uncertainty means whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience.
In responding to this question, we suggest that you include the objective of the project and describe the scientific knowledge or the new or improved capability you were seeking. Your response should indicate the existing scientific or technological knowledge base at the onset of the SR&ED project. Describe the shortcomings or limitations of that knowledge base that prevented you from overcoming the scientific or technological uncertainties identified. In other words, your response should describe how the uncertainties could not be resolved on the basis of generally available scientific or technological knowledge or experience.1
We find that the knowledge base and/or reviews of existing solutions including why they are not sufficient for this project missing from Line 242 or included in Line 244. Line 242 should include the knowledge base at the start of the SR&ED project. It should also include limitations to why the knowledge base was not sufficient and uncertainties faced that could not be resolved with generally available scientific or technological knowledge.
Good:
– Clear Objective
– Knowledge Base (Public & Internal) Defined
– Measurable Goals (“SMART” goals)
– Focus on Technology
– Experience of Team Clearly Stated
Poor:
– Unclear Objective
– No statements clarifying knowledge base
– Qualitative or Subjective Goals
– Focus on Product or Commercial Requirements
– Team qualifications unsuitable or not stated
**Special note for multi-year projects: it is considered bad form to copy/paste text between periods, especially if you do not update your knowledge base for the current period.
For more information please see our post devoted to Line 242 in Line 242: Uncertain about Uncertainty? No problem.
Line 244 – SR&ED Work Performed
Next, we also find mistakes in Line 244 of the SR&ED technical narratives. This section is where work performed is described. The T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661 explains:
Line 244 – What work did you perform in the tax year to overcome the scientific or technological uncertainties described in line 242?
(Maximum 700 words)In responding to this question, describe, in a clear and concise manner, how you attempted to overcome the scientific or technological uncertainties that you identified at line 242.
Describe the work done in chronological order. In doing so, clearly demonstrate the systematic nature of the investigation or search. This includes describing;
- the hypotheses designed to reduce or eliminate the uncertainties;
- experiments and/or analysis conducted to test the hypotheses;
- the results obtained; and,
- the conclusions.
If this is a continuation of a previously claimed project, it is important that you focus on the work carried out during the tax year for which you are making the claim.
If all or part of the work was performed on your behalf by contractors, include that work in your description and identify that the work was performed by contractors.1
Line 244 is the longest section of the technical narrative and many people do not capitalize on the space allotted. In this section, it is important to illustrate that the scientific method was followed. One way to do this is to explain your hypothesis, testing, results, analysis, and conclusions for each part of your project in chronological order. As you do this explain what you found through experimentation and issues you faced. If this is cut and dry and there were no uncertainties, your project may not be eligible for SR&ED. To read more about this please see our post SR&ED – A Plain-Language Eligibility Quiz and Self-Assessment.
In this section, it is important to explain the “experimental development” vs. “development”. The Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives expands on experimental development:
Experimental development is, by far, the most commonly claimed category of work. This work is conducted in an attempt to generate or discover technological knowledge or know-how in order to develop new or improved materials, devices, products or processes.
In experimental development, the attempt to generate new technological knowledge for the purpose of creating new, or improving existing, materials, devices, products or processes can occur in different situations. It can occur when there is a need to generate entirely new technology to meet your objective; when there is a need to make improvements to existing technology; or when there is a need to take existing technology and apply it in a new environment or context to meet your objective. Regardless of the situation, what is required is that the work be conducted for the purpose of advancing the understanding of technology, given there is an insufficiency of technological knowledge to achieve your objective. This new technological knowledge can be incorporated in the new or improved materials, devices, products or processes, and is often represented by the technological know-how, methodologies or techniques gained. Technological know-how includes the knowledge of how various constituents are embodied within the materials, devices, products or processes, and work together to meet your objective.3
Do not skip ahead to the final solution, explain what knowledge was generated and the knowledge that enabled you to develop your final solution. Often, this knowledge can be applied to further experimental development.
For more information please see our post devoted to Line 244 in Work Performed: Making Sure You Include Enough Detail (Line 244).
Good:
– Stepwise Progression is shown.
– Scientific Method followed.
– Metrics are used.
– Hypotheses are present, measurable, and refined based on the results of experimentation.
– Results of experimentation are present.
Poor:
– No evidence of a clear methodology.
– Work described is cut and dry – no uncertainties encountered.
– Trial and Error.
– No hypotheses present.
– No results or conclusions.
Line 246 – SR&ED Scientific or Technological Advancements
Additionally, Line 246 often has mistakes as this section of the SR&ED technical narratives is used to describe the scientific or technological advancements. The T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661 explains:
Line 246 – What scientific or technological advancements did you achieve or attempt to achieve as a result of the work described in line 244?
(Maximum 350 words)Describe the new scientific knowledge you gained or the technological advancements you achieved, or attempt to achieve, as a result of the SR&ED work you performed.
Note that it is the advancement in the underlying science or technology that is important, not how the work advanced your business or business practices.
In responding to this question, we suggest that you focus on how the work you described at line 244 advanced the scientific or technological knowledge base that existed at the onset of the project. In other words, describe the information or the knowledge generated that advanced your understanding of scientific relations or technology.1
One big mistake we see is taxpayers describing the final results of their work and the new functionality but do not make clear the new information or knowledge that enabled this new functionality. A new combination of technology does not by definition ensure SR&ED occurred. This section must explain the new information or knowledge generated as a result of your work. Some questions to ask: What did you discover about the underlying technology? Did any of the results surprise you? If it did not work, why?
For more information please see our post devoted to Line 246 in Getting Ahead: Scientific or Technological Advancement (Line 246).
Good:
– Not using standard tools or techniques.
– Description of how the underlying technology was advanced – not the product.
– Metrics are used.
– Analysis of why it did or did not work.
– Developed & implemented new knowledge and it is more broadly applicable.
Poor:
– Discussion of commercial application/advancements to a product.
– “Learned”
– Used established techniques.
– Subjective wording – no metrics.
– No advancements to the technology or knowledge base.
In all Lines
Metrics
Furthermore, we often see taxpayers who use phrasing like “several”, “many”, “a large number”, “faster”, and other terms that are not quantifiable. Use metrics to quantify your work. These metrics help to define the work in a measurable way which can help to show advancements.
References to commercial products and projects
Be sure to remove all references to commercial projects and products. Focus on the science and technology, not a specific product or project. Terms such as reverse engineering, market research, company names, and commercial applications are all “red flag” terms for the CRA who is not interested in these items and it may jeopardize your eligibility.
Word Count
Check for accuracy
Conclusion
As consultants, we see many mistakes in SR&ED technical narratives. Most of these errors can be avoided. If you are unsure about what you are including in your narrative or how to fill out the forms, we recommend hiring a consultant to assist you. We also have the Comprehensive Guide to SR&ED available for purchase with more guidance on writing your SR&ED technical narrative and avoiding these common mistakes.