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17 Due Diligence

17 Due Diligence

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Published by SRED Unlimited
Bruce explains what the CRA means by the term "due diligence".
Bruce explains what the CRA means by the term "due diligence".

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Categories:Types, Brochures
Published by: SRED Unlimited on Dec 02, 2010
Copyright:Attribution Non-commercial

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12/24/2010

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Copyright 2010 Bruce MadoleDue Diligence
Due Diligence
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 – technologicaluncertainty, the pursuit of technological advancement, or experimental development.“Due diligence” is one of those expressions, and because it sharply affects the way inwhich technological uncertainty is interpreted, we need to discuss these terms together.Many claims for SR&ED will begin by framing a statement of some technologicalobjective (we wanted to do so-and-so) and combine that objective with one or morestated reasons why “we were uncertain about whether that (so-and-so) could beaccomplished.” 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 givendesign 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 standardapproaches 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
 
Copyright 2010 Bruce MadoleDue Diligenceis the road leading up to the uncharted wilderness of technological uncertainty.
 Duediligence
is not SR&ED – it is the preparation for SR&ED. Technological uncertainty, inturn, is seen as a problem, barrier or obstacle, the dimensions of which you have alreadytried to clarify through standard practice and professional disciplines, to the point whereyou can truly say “I don’t know how (best) to solve this problem.” (This is the point fromwhich your SR&ED journey is expected to begin by means of “experimentaldevelopment”.)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 invarious CRA guidance and policy papers.) Due diligence according to the CRA includesa 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 doesexperimentation or experimental development, then
due diligence
is what they will callthat work. Your SR&ED claim will be reduced accordingly.. You need to be prepared to frame or limit the
due diligence
discussion bycreating and keeping clear evidence about the work you do – from the
due diligence
work to the point at which you actually begin experimental development, including notes aboutthe framing of your technical hypothesis, various approaches considered, and so on.Failing to keep good evidence of the SR&ED work may allow CRA to expand the scopeof what they describe as due diligence beyond what seems reasonable to you. Thedefinition of 
due diligence
itself is elastic – it expands up to the limits imposed by actualevidence of SR&ED.

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