In the first step of CRA's two-step analysis of SR&ED ("determine if there is SR&ED" and "determine the extent of eligible work"), CRA sets out five questions, based on the s. 248(1) definition of SR&ED:
Subheading 2.1.1: Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?
[Doubt as to a problem's solution] can arise from a technical problem or from a technological uncertainty, so it is important to make a clear distinction between the two. A technical problem is resolved by applying practices, techniques, or methodologies that are known by the company or available in the public domain. ... On the other hand, a technological uncertainty cannot be resolved using the existing technology base or level and requires experimental development to resolve the problem....The size and complexity of a project by itself does not justify that the work performed in that project falls within the definition of SR&ED. ... However, a form of technological uncertainty called system uncertainty can arise from or during the integration of technologies, the components of which are generally well known. ... The attempt to resolve these uncertainties by a systematic investigation or search can lead to technological advancement.
Subheading 2.1.2: Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Here, "hypothesis" means an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea.
Subheading 2.1.3: Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?
In SR&ED, it is expected that a planned approach is formulated; that is:
The need for a systematic investigation does not preclude ideas that result from intuitive processes. Intuitive creativity can give rise to ideas without evident, ordered, rational thought or inference. These ideas can lead to hypotheses for testing that are part of experimental development.
...Solving problems by trial and error is not experiment or analysis within the framework of a systematic investigation or search.
Subheading 2.1.4: Did the process result in a scientific or a technological advancement?
Scientific or technological advancement is the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology. One implication of advancement is that the new knowledge is applicable in a broader sense. That is, the new knowledge could be useful to other situations or circumstances beyond the current project in which the advance was made.
The rejection of a hypothesis is advancement because it eliminates a possible solution....
Process optimization and cost reduction are examples of process development efforts with the objectives of improved efficiencies, better output quality, or financial or strategic advantages. ... If such process optimization efforts do not face and address one or more clearly articulated technological uncertainties, then they are not experimental development.
Subheading 2.1.5: Was a record of the hypotheses tested and the results kept as the work progressed?
It is important to note that this question pertains only to documentation that is naturally produced during the performance of SR&ED. Please refer to Appendix 2 of the latest version of the T4088 Guide to Form T661 Scientific Research and Experimental Development (SR&ED) Expenditure Claim for information on documentation and other evidence to support an SR&ED claim.
