You may have heard someone from the Canada Revenue Agency (CRA) speak about “due diligence”, and wondered what they meant by that? The answer is – they probably mean more by it than you would like.
You may have noticed that a lot of the SR&ED program hangs on the meaning of various expressions, such as the definitions of key technical criteria – technological uncertainty, the pursuit of technological advancement, or experimental development. “Due diligence” is one of those expressions, and because it sharply affects the way in which technological uncertainty is interpreted, we need to discuss these terms together.
Many claims for SR&ED will begin by framing a statement of some technological objective (we wanted to do so-and-so) and combine that objective with one or more stated reasons why “we were uncertain about whether that (so-and-so) could be accomplished.” According to the CRA, such doubts or speculations represent, at best, a “business uncertainty”, not a technological one. Technological uncertainty is not doubt. Nor is it anxiety, worry, concern, or even a suspicion that “all is not well” with a given design approach. From the CRA perspective, the word combination “uncertainty… whether” provides a clear signal that you have not yet defined the precise nature of your technical problems. Which brings us to due diligence.
Due diligence is a catch-all phrase that encompasses all of the standard approaches and normal practices that you are expected to have tried or ruled out first, before you arrive at the technological uncertainty. The implication is that due diligence is the road leading up to the uncharted wilderness of technological uncertainty. Due diligence is not SR&ED – it is the preparation for SR&ED. Technological uncertainty, in turn, is seen as a problem, barrier or obstacle, the dimensions of which you have already tried to clarify through standard practice and professional disciplines, to the point where you can truly say “I don’t know how (best) to solve this problem.” (This is the point from which your SR&ED journey is expected to begin by means of “experimental development”.)
In this scenario, “uncertainty… whether” has progressed to “uncertainty about how to”. (There is a good reason why the phrase “know-how” keeps turning up in various CRA guidance and policy papers.) Due diligence according to the CRA includes a lot of the work you would do around exploring or scoping a technical problem, and if the work that you are doing resembles standard or routine practice more than it does experimentation or experimental development, then due diligence is what they will call that work. Your SR&ED claim will be reduced accordingly.
To be continued...
Bruce Madole