Perhaps you are familiar with the phrase “the sound of one hand clapping”. It’s all very mysterious and evocative. I’m not particularly mystical or meditative, but I’m going to use this phrase in a discussion of two opposite extremes in the preparation of an SR&ED claim. My thesis is simple — an SR&ED claim needs to strike a balance between a description of the qualifying technical work, and the costs that may be reasonably associated with that work. Putting too much emphasis on either the financial or the technical aspects of the claim will endanger the claim.
Let’s suppose, for the sake of this analogy, that the financial and technical aspects of the claim represent one hand each, whether clapping or otherwise. Put yourself in the position of the Science Reviewer who has been asked to review a claim. In our first extreme example, the claimant has assembled a claim that provides exhaustive coverage of all of the costs associated with doing the claimed technical work, but those costs are not linked to any description of the technical work performed. (Of course, this is impossible, you might observe, because even in the new short form you have to fill in something about the technological uncertainties, technological advancements, and work done, or you won’t have a claim. It’s an extreme example, as I said, but please also reflect that if you choose to write about the wrong things, such as business risk or the routine development of commercial functionality, then the reviewer will find his or herself just as challenged for information as though you had written nothing at all.) In this example, there’s no way to tell which costs are related to the SR&ED, or whether any SR&ED has in fact occurred, because the claim lacks the fundamental details that would transform the list of costs into a real claim, by either qualifying the eligible or eliminating the ineligible.
The costs in this first example would be classified as “unsupported”. That’s not “one hand clapping” – it’s the sound of one hand waving goodbye to a SR&ED claim, simply because there was no effort to deal with the technological basis for claiming.
In the second extreme example, the project description is richly endowed with details of technological uncertainty, the pursuit of technological advancement, and a detailed history of the work performed. But there are no costs associated with doing that work. No time spent. No equipment purchase or materials consumed or transformed. The work might as well have been done by ghostly volunteers.
That sounds absurd, and of course it is. If you had all of that information available about who was doing what, and when and why they did it, there would have to have been some kind of record, right? That would have been evidence that the work was going on? There’s no point in a claim if you can’t link to any costs associated with doing the work: in the absence of costs, you are left with some pretty impressive volunteering. The one hand, in this case, is not clapping – it’s the sound of a reviewer scratching his head in puzzlement, wondering why you bothered to prepare anything at all, if you didn’t want the money.
Claiming SR&ED work is about claiming costs that are “commensurate with” the work performed, and vice-versa. It means, in practical terms, that you have avoided both of the extremes we have been writing about, and found a reasonable balance between what is claimed, and what isn’t, and that those reasonable eligible costs are quite reasonably linked to the eligible work.
In the end, claiming SR&ED is all about getting the balance right, and linking the effort to the eligible costs. Get that part right, and you will hear something not all that Zen-like or mysterious: the sound of two hands clapping. It’s called applause.