Administrative Guidelines for Software Development

2 SR&ED Project Definition

An "SR&ED project" must fall within the definition of SR&ED contained in subsection 248(1) of the Income Tax Act. Such a project comprises a set of interrelated activities that collectively are necessary for the attempt to achieve the specific scientific or technological advance(s) defined for the project, are required to overcome scientific or technological uncertainty, and are pursued through a systematic investigation by means of experiment or analysis performed by qualified individuals.

The SR&ED claim must be submitted showing the work structured as SR&ED projects so that the CCRA can determine eligibility. In whatever way companies choose to organize their software development efforts, the claim for tax credit purposes must only include the work that meets the SR&ED project definition above. Exhibit A gives a hypothetical example of how an SR&ED project might occur in the context of a company's product development project.

Exhibit A

---

In this case, the company project is to develop a new version of a software product. Note that the SR&ED project is a subset of the company project and comprises the work focussed on the technology development rather than the product features; it is not the same work described in different words. The example is intended only to illustrate SR&ED project structure; the field of work described is not an issue, nor whether the work is actually eligible. The point of the example is that the SR&ED project description can readily be evaluated to determine eligibility while the company project description cannot.

Company project	SR&ED project
Project Title	Project Title
Property Records Management System (PRMS) Version 4.0	Using a Data Communications Approach to Improve a Custom Data Management System (DMS)
Objective	Technological Objective
To develop Version 4.0 of PRMS, an easy-to-use full-featured property records management system.	To at least double DMS speed over that achieved in PRMS Version 3.5.
Background	Background
XYZ Co. is a leading edge software products company. Our first PRMS product was developed in 1992. It is the most comprehensive and easy-to-use product in its class. We have installed over 100 licences to date.	XYZ Co. has developed a proprietary DMS as part of its PRMS product. The DMS works well with small data sets, but has excessive access times (>> 30 seconds) with large databases (>> 1 gigabyte (GB)).
Project Activity	Project Activity
This project was undertaken to develop PRMS 4.0, a new version required to maintain our competitive edge. Activities included: review of customer requirements and competing products; preparation of a functional specification; development of prototypes; design and development of: faster query and update capability; easier to use user interface; user defined field edits; expanded import/export facilities; new mail merge utility; multilingual capability; alpha testing internal to XYZ Co.; beta testing with selected customers.	A literature review showed that the relational data model used in the DMS could be inefficient in some circumstances. We decided to determine if a data communications model would achieve processing efficiencies, at the expense of additional storage space. A prototype packet data model DMS was created that was 75% faster than the existing data manager. Comprehensive benchmark tests were conducted to compare performance between the two data models. While some of the tables could be processed more effectively if they were in packet form, others were best managed through relational techniques. A hybrid approach involving both relational and packet data management techniques was experimentally employed in upgrading from PRMS 3.5 to 4.0.
Advanced Features	Technological Advances
much faster query and update capability; re-designed, easier-to-use user interface; addition of user-defined field edits; expanded import/export facilities; new mail merge utility and multilingual capability; ability to work with databases > 1 GB.	We developed a hybrid data management technique that improved query and update capability from > 30 seconds to < 15 seconds in most problem situations. This new technique allowed PRMS to store and access databases > 1 GB (not possible with competing products at the time).
Project Uncertainties	Technological Uncertainties
uncertain what features were required by customers; uncertain how to store user-defined edit rules; uncertain how to provide bilingual prompts and error messages without impacting performance; uncertain how to reduce complexity of the product; uncertain how to access large databases faster; uncertain how to manage random access memory.	impact on performance of using a data model designed for data communications in a relational environment could not be predicted; inefficiencies resulting from a hybrid model using both relational and packet access against the same database might have reduced the improvements quantified for the prototype packet model DMS.

Subsection 248(1) of the Act embodies the basic principle that SR&ED is a systematic investigation or search performed for scientific or technological advancement. As a result, the taxpayer must define the objective or objectives of the SR&ED project in scientific or technological terms, stating clearly the advance or advances to be sought, and must show that all the work performed on the SR&ED project was systematically directed towards the attempt to achieve that technological advancement. If the SR&ED project fails to achieve the intended technological advancement or branches off in a new direction, the work done can still be eligible if it meets the criteria, and a new SR&ED project with a new technological advancement goal might be initiated.

The SR&ED project is tracked and claimed on the basis of the technology being advanced, not based on the benefits to the company or to users arising from the new features found in the software product or information system. Exhibit A illustrates that the taxpayer must correctly identify an SR&ED project in the context of a software product development. An information system usually addresses a business process that involves information processing and includes technology as one element. The technology may or may not have arisen through, or incorporate, SR&ED performed by the taxpayer. The SR&ED project is directly concerned only with the process of developing technology and comprises the activities that are necessary for the attempt to achieve the technological advancement. SR&ED project descriptions must be structured according to areas of science or technology. SR&ED is only indirectly concerned with the characteristics of software products, information systems, or business processes, and then only if their development requires achieving technological advancement.

Management information systems (MIS) contain software programs that help collect, manipulate, and present data relating to the operational processes of the taxpayer's business. MIS functions include accounting, payroll, personnel records management, sales lead tracking, manufacturing or production management, inventory control, distribution, customer service, management reporting, electronic mail, electronic data interchange, and other similar software applications. Care must be taken to separate the benefits of automating or improving the operations of a business from the advances in the underlying science or technology that are being attempted. The benefits are not relevant to determining eligibility. While MIS projects may contain SR&ED, in many cases an SR&ED project will represent only a minor part of an MIS project.

The SR&ED project definition is not intended to support the subdividing of SR&ED projects that have been correctly identified into smaller and possibly ineligible activities. The concept of the "set of interrelated activities that collectively are necessary..." embodied in the SR&ED project definition ensures that a project that is performed for the purpose of technological advancement is evaluated as a unit, provided that all the activities identified for the project are commensurate with the needs of, and directly support, the attempt to achieve the technological advancement, as required by subsection 248(1) of the Act.

The integration of several parts of a system may be or may include an SR&ED project. It may be valid to speak of system uncertainty, as discussed in section 3.2, at the level of the integration of the system.