The CRA's 'Five Questions' for SR&ED Eligibility

If your SR&ED claim is audited, the CRA reviewer will not rely on gut feeling to determine eligibility. They are bound by a legal framework established by the monumental 1998 Tax Court of Canada case, Northwest Territories v. The Queen.

This case established the "Five Questions" that define SR&ED. If your project narrative cannot answer 'yes' to all five, your claim will be denied.

The Five Questions

1. Was there a scientific or a technological uncertainty?

Could a competent professional in your field have solved the problem using standard practices and existing knowledge? If the answer is yes, there was no uncertainty. You must prove that the 'how' or the 'if' was unknown at the outset.

2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?

Did your team have a structured plan? You cannot simply try random things until something works; you must form a hypothesis (e.g., "We believe replacing the SQL database with a custom in-memory graph structure will reduce latency by 90%").

3. Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?

This is the evaluation of your scientific method. Did you execute the hypothesis, measure the results, analyze the failures, and iterate? This question is answered almost entirely by your contemporaneous documentation (timesheets, commit logs, test results).

4. Was the overall approach undertaken for the purpose of achieving a technological advancement?

Was the goal to generate new knowledge? Even if the project failed commercially, did you learn something new about the limitations of the technology you were testing?

5. Was a record of the hypotheses tested and the results kept as the work progressed?

This reiterates the absolute necessity of contemporaneous documentation. Note the phrase as the work progressed. Reverse-engineering documents at year-end violates this criterion.

Summary

When writing your T661 Project Descriptions, use the Five Questions as an outline. Literally structure your narrative to explicitly address the uncertainty (#1), the hypothesis (#2), the systematic testing (#3), the advancement (#4), and reference the logs you kept (#5).

Speaking the CRA's legal language is the fastest way to get your claim approved without friction.