Scientific Research & Experimental Development


Life Choice Ltd. v. The Queen, 2017 TCC 21 (Informal Procedure)

no SR&ED without testing

The taxpayer was a natural health product company. Its alleged SR&ED consisted of reviewing the literature and consulting other researchers in order to devise three new naturopathic formulations. It described its final testing as submitting its formulations to Health Canada for approval which, once obtained, caused it to deem its formulations to be effective.

In dismissing the appeal, Boyle J stated (at paras 49-50):

[A] newly hypothesized formulation cannot on its own be considered either knowledge or the advancement of knowledge for these purposes.

It is the absolute absence of testing of the natural health products by Life Choice after their formulations were hypothesized by Dr. Dahl that is fatal to this appeal. …

Boyle J further stated (at para 53):

My decision in this case is in no way intended to suggest that literature reviews and consultations with other researchers cannot be qualifying activities giving rise to qualifying expenses as legitimate constituent parts of SR&ED activities. …

Jentel Manufacturing Ltd. v. Canada, 2012 DTC 5031 [at 6682], 2011 FCA 355

The taxpayer, a producer of plastic containers, undertook a project to "improve the existing product to make it a smaller and significantly lighter storage system" (para. 9 of Statement of Appeal, quoted at para. 5). The Court agreed with the trial judge that the taxpayer's methods, which included changing the type and thickness of plastic used, changing the moulds and the casting materials, and using different types of material for the stand, did not entail "technological risk or uncertainty which could not be removed by routine engineering or procedures" (para. 6).

The taxpayer's argument that there was "no process in existence that could create moulded plastic items with the shapes, features and capabilities sought" was not persuasive. Evans J.A. stated (at para. 10):

Jentel acknowledges that a major part of the manufacturing technology puzzle was pre-existing. ... This recognition that thermoforming and injection moulding techniques and procedures were pre-existing (and therefore accessible to other professionals in the field), coupled with the fact that Jentel had previously used both methods and did not suddenly begin to use them in the 2005 fiscal year, supports the reasonableness of the judge's conclusion that Jentel was using an available, standard manufacturing process.

The taxpayer's SR&ED credits were therefore denied.

Blue Wave Seafoods Inc. v. Canada, 2006 DTC 6155, 2006 FCA 81

The Tax Court judge had committed no reviewable error in finding that in the last two taxation years under review, there was no longer any remaining scientific or technological uncertainty being addressed by the taxpayer in developing a commercial silver hake operation, so that related expenditures for those years did not qualify as SR&ED.

Words and Phrases

R I S - Christie Ltd. v. Canada, 99 DTC 5087 (FCA)

The taxpayer was entitled to have its expenditures treated as SR&ED notwithstanding the absence of documentary evidence relating to the repeatability of the testing data.

See Also

Robotx Solutions Inc. v. The Queen, 2017 CCI 73

solving narrowly-cast production engineering problems was not SR&ED

The taxpayer was a corporation that improved customer’s equipment by increasing their lifespan, improving their security mechanisms or by standardizing them in order to produce economies of scale. In 2012, it entered into four separate contracts with four customers to provide them with specific solutions within the scope of this services business, and treated $182,483 of the expenditures which in incurred in the course of performing this customer-specific work as SR & ED expenditures.

Respecting the first project undertaken for an alcohol products company, Jorré J stated (at paras 50, 58, and 62-63, TaxInterpretations translation):

… [T]he purpose of the project was to make the palletizers and depalletizers [of beverage bottles] conform to current security standards and to eliminate the risk of the lifting platform falling when an operator or mechanic was underneath. …

… [T]here is nothing in the evidence that suggests that palletizers and depalletizers meeting the required safety standards do not already exist or that there is an improvement over what already existed . …

Difficulties by themselves are not sufficient for their resolution to become experimental development.

Looking for technological advances in a process, I would expect that the novelty or improvement sought could be clearly and accurately described in relation to current processes. That is not the case here.

Jorré J similarly found that the second project, which entailed designing, making and installing a “flow rectifier plate” to straighten-out rectangular aluminum bars coming out of an extruder as part of the customer’s production process, did not meet the criteria for experimental development, stating (at para. 86):

There is no clear and detailed proof for each stage of the work that would lead to the conclusion that specific individual work, certain groups of work or all of the work was engaged in to resolve technological uncertainties that could not be resolved with current methods and existing knowledge.

Jorré J further found that the third project, to upgrade a municipal water treatment plant, did not require unusual methods (para 95), and the fourth project, to optimize the performance and safety of a milling machine, did not deal with technical uncertainties (para 106). Jorré J dismissed the appeal.

Formadrain Inc. v. The Queen, 2017 CCI 42 (Informal Procedure)

improving the process for repairing drains qualified

The taxpayer, whose business was the repair of sewers and other drains from the inside rather than through excavation, undertook two projects to develop a single-use light mandrel (i.e., tube) to facilitate the installation of a sheath from inside the drains, and develop a process and equipment to install the sheath using a single access point from inside a building (through a cleanout and using pushing) rather than also from the street (using a manhole and pulling rather than pushing the mandrel). This would permit it to start repairing residential drains from within.

Respecting a Crown argument (at para. 87) that the source of technological uncertainty respecting the project was “entirely in the chemical composition of the material [forming the mandrel], a task which was delegated to a rubber manufacturer,” D’Auray J stated (at paras. 87-88, TaxInterpretations translation):

I have difficulty with the argument of the respondent since paragraph (d) of the definition of research and development in subsection 248(1) of the Act includes development work undertaken in Canada by or on behalf of the taxpayer.

Furthermore, the Policy on expenses respecting contracts for research and development of December 2014 provides that expenses made under a subcontracting agreement for the account of the contractor are as eligible as if they had been performed by the contractor itself.

She went on to state (at para. 96):

[T]o reduce the entire project of the appellant respecting the mandrel to the sole aspect of research into the formulation of the rubber constitutes a simplistic view of the work which was performed in reality.

And (at para. 101):

[T]he appellant did not know at the outset how it would develop and install a mandrel for targeted use in pushing within a conduit.

In also rejecting a submission that the taxpayer researched by “trial and error,” she noted that the taxpayer’s engineers analyzed the project’s technological challenges and specified in advance in their notebook the various trials to be conducted.

Accordingly, most of the taxpayer’s SR&ED claims were sustained.

Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen, 2017 TCC 6 (Informal Procedure)

solving a challenge by trial and error did not qualify

The taxpayer (“JTR”) undertook a project in 2008 (the “Fire Curtain Project”) and in 2009 (the “Manual Override Project”) to solve two problems that it had encountered in its business of designing, manufacturing and installing theatrical rigging. The Fire Curtain Project successfully developed a technique for producing a controlled descent of a fire curtain without using counterweights (which consumed space.) The Manual Override Project successfully developed a technique for dealing with an issue in opening and closing curtains after there had been a power outage that eliminated the memory of a limit switch and, therefore, its ability to help control the movement of the curtain. Both projects were performed by employees with no science degrees or qualification as professional engineers, and involved trying out different combinations and configurations of standard equipment and devices to identify what could produce the desired result.

Sommerfeldt J found that this work was routine engineering and otherwise failed many of the tests enunciated in Northwest Hydraulic, so that it did not qualify as scientific research and experimental development. In the course of so finding, he stated (at para. 40) that “there are several cases which, while not saying so explicitly, suggest that trial and error may well fall outside the scientific method” and that the activities in the first project and the reconfiguring steps in the second project “seemed more in keeping with trial and error than with the scientific method” (at para. 42 re the Manual Override Project, similarly at para. 41 re the Fire Curtain Project).

He concluded (at para. 53):

JTR has failed to adduce sufficient evidence to establish that those activities did not constitute routine engineering, that there was technological uncertainty in respect of the Fire Curtain Project and the Manual Override Project, that the scientific method was followed, and that technological advancements were achieved in respect of each project.

Words and Phrases
trial and error

Emotion Picture Studios Inc. v. The Queen, 2016 DTC 1005 [at 2519], 2015 TCC 323 (Informal Procedure)

experiments to maximize internet search rankings were not SR&ED

The taxpayer was engaged in determining how on-page and off-page variables for websites interrelate to determine their Google (or other internet search engine) ranking and how to structure data to improve such ranking. In finding that this activity did not qualify as SR&ED, C Miller J stated (at para. 9) that “the experiments of submitting several different versions of websites to determine the significance of variables relies on existing technology in a routine manner,” and (at para. 10):

Here, the advancement would be the determination of algorithms that relate variables for purposes of ranking sites. … I fail to see how it is a scientific advancement to figure this out. It strikes me more of solving an equation someone has already solved, rather than coming up with a new proof.

ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2015 DTC 1212 [at 1366], 2015 TCC 263

new knowledge required to adapt software to poor local infrastructure

The taxpayer had to adapt its existing system for implementing a nation-wide health information system in Belize given the severe telecommunications and internet connectivity issues there. In finding that this project satisfied the test of technological uncertainty, Campbell J stated (at para. 31):

The Appellant had no reasonable expectation of success with the Belize project unless new knowledge could be obtained. …[T]he Appellant developed a new approach by creating a multi-write database replication system.

Before finding (at para. 42) that the taxpayer "had identified the problems with the project, developed its objectives, formulated hypotheses and testing scenarios and modified or re‑developed its approach in response to the results it was obtaining," she noted (at para.39) that:

While it will always be preferable that an appellant maintain contemporaneous documents to support its systematic investigative procedures and methods…the Act contains no legislative requirement to file those documents in order to qualify… .

Accordingly, the related expenditures gave rise to investment tax credits.

Hypercube Inc. v. The Queen, 2015 DTC 1135 [at 859], 2015 TCC 65 (Informal Procedure)

development of code analysis software entailed standard techniques

Lamarre ACJ found that the taxpayer's development of code analysis software for websites was not experimental development. All problems encountered on the project were "resolved in the end by using recognized programming techniques to modify the program's code" (para. 46), and the team's alleged "trial and error" approach was really just ordinary debugging - for example, the program was initially only compatible with certain web browsers, it had a defect in the code that prevented it from working if used more than 150 times in one day, and it had initially not been designed to handle URL redirects correctly. As per Zeuter, mere novelty or innovation in software does not automatically elevate it to SR&ED (para. 47).

6379249 Canada Inc. v. The Queen, 2015 DTC 1109 [at 638], 2015 TCC 77

incremental improvements to an already-launched device were experimental development

After developing and commercially launching a miniature portable printer, the taxpayer pulled the product in 2009 after identifying problems with curling paper and battery life. The taxpayer performed further work in 2009 and 2010 to remedy these defects (with partial success). The Minister characterized the work as routine engineering.

D'Auray J allowed the taxpayer's appeal. Paragraph (c) of the definition of "scientific research and experimental development" ends with "including incremental improvements thereto," and the French wording ("même légère, de ceux qui existent") makes it clear that experimental development includes "a slight improvement to materials, devices, products, or processes" (para. 100).

The further work included investigating the causes of the defects (which both turned out to be related to the anti-paper-curling mechanism), investigating and implementing a power-consumption curve in the printer's driver to avoid power-costly motor-stalling, finding new materials and surfacing methods in the anti-curling mechanism to make it more resistant to wear, and figuring out how to test paper at different moisture levels. D'Auray J disagreed with the Minister's "analytical approach" of applying the SR&ED tests to each of these activities individually - although, in any event, each individual activity passed those tests (para. 103). Although the taxpayer did not file any documents establishing its systematic investigation, this was established on the testimony of its chief researcher (paras. 92-3) (whose testimony that the required scientific report had been included with a form T661 filing was also accepted).

Feedlot Health Management Services Ltd. v. The Queen, 2015 TCC 32

feed for cattle to be used for beef after SR&ED testing was excluded

The taxpayer, a veterinary consulting firm, undertook four research projects to test new diets, supplements, and vaccines on cattle, and paid feedlot operators to perform these protocols. The 7000 cattle used in testing by the operators were, apart from the test protocols, raised for commercial production on behalf of their owners. The Minister disallowed scientific research and experimental development credits respecting over $1.6 million paid by the taxpayer to one of the farms ("Jim Farms"), for costs incurred by Jim Farms for the feeding the cattle, on the basis inter alia that Jim Farms was not engaged in SRED.

Before finding that the amounts paid to Jim Farms were "in respect of" the prosecution of research undertaken on the taxpayer's behalf within s. 37(8)(a)(ii)(B)(II), and that the work undertaken by Jim Farms was with respect to testing and data collection as per para. (d), Woods J found that Jim Farms' work was not SRED because it was performed "with respect to" the commercial use of a new process (i.e. the feeding protocols), as the cattle were at the same time exploited in his regular cattle business, and therefore was caught by the exclusion in para. (i) of the SR&ED definition, an exclusion which extended to work by third parties (para. 80).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(B) work by proxy need not be "for" SRED - only "in respect of" it 304

1726437 Ontario Inc. (AirMax Technologies) v. The Queen, 2013 DTC 1008 [at 54], 2012 TCC 376 (Informal Procedure)

The taxpayer, which installed heating, air conditioning and ventilation systems in residential homes, claimed SR&ED credits relating to its "High Static High Velocity Fan Coil System Development" project. The Minister denied the credits on the basis that the project entailed routine engineering.

Hogan J. granted the taxpayer's appeal, subject the $12,000 limit under the informal procedure. The goal of the project was to reduce noise from vents occurring throughout a house, achieve constant static pressure, and adapt a foreign boiler and motor to North American standards in order to use them in a system for which they were not designed and in which they had not previously been tested. These goals entailed substantial technological risk and uncertainty. Based on that finding, and considering the project under the other four factors listed in Northwest Hydraulic, Hogan J. found that the project qualified as SR&ED.

Murray Arlin Dentistry Professional Corporation v. The Queen, 2012 DTC 1149 [at 3339], 2012 TCC 133 (Informal Procedure)

Woods J. found that it was not reasonable for the taxpayer, a professional corporation belonging to Dr. Arlin, to claim credits on the basis that one fifth of Dr. Arlin's salary was in respect of scientific research. Dr. Arlin was a dental surgeon, who used specialized software to accumulate data over approximately fifteen years on the approximately 12,000 dental implants he administered in that time. His evidence was too vague to support a conclusion that he actually spent much time on these activities, and the convenient nature of the software suite also suggested that the time investment would have been minor.

Woods J. also stated (at para. 20):

It is the position of the respondent that there was insufficient evidence of systematic investigation because hypotheses were not determined prior to the data collection. This position is very narrow and I am reluctant to agree with it.

Soneil International Limited v. The Queen, 2011 DTC 1282 [at 1592], 2011 TCC 391

D'Arcy J. denied the taxpayer's claimed SR&ED credits arising from the development of various electrical systems for use in wheelchairs - a power optimizer to switch power between the front and back wheels of a wheelchair or scooter, an inhibitor to ensure that a wheelchair remain stationary while being charged, a virtual battery system to derive 36 volts of potential from two 12-volt batteries, and a multi-voltage output charger. The purported technological uncertainty was not compelling, as the issues raised were design problems rather than scientific problems. (For example, the purported uncertainty in the virtual battery project was "whether a safe and effective virtual battery could be developed that would be suitable for use by disabled people operating wheelchairs.") The work could be completed using existing electronic and mechanical components, and products performing similar functions already existed.

Advanced Agricultural Testing Inc. v. The Queen, 2009 DTC 687, 2009 TCC 190

The taxpayer in carrying out work largely under the supervision of a researcher who was not its employee or representative, and in testing the effectiveness of products that had already been commercially developed, did not qualify for deduction as SR&ED.

Zeuter Development Corporation v. The Queen, 2007 DTC 41, 2006 TCC 597 (Informal Procedure)

novelty or innovation is not sufficient to illustrate technological advancement

Little J found that a project of developing an interactive software tool to assist high school students with physics and mathematics did not qualify as SR&ED because there was no technological or scientific uncertainty involved. He stated (at para. 24):

Novelty or innovation in a product is not sufficient to illustrate technological advancement; rather, it is how these features arise that is important, that is whether or not they arise through the process of SR & ED.

Tacto Neuro Sensory Devices Inc./Appareils Neurosensoriels Tacto Inc. v. The Queen, 2005 DTC 457, 2004 TCC 341

Work carried out by the taxpayers to improve the performance of a tactometer represented "routine techniques and standard procedures generally accessible to competent professionals in the field" (p. 461), and did not qualify as SR&ED.

Maritime-Ontario Freight Lines Limited v. The Queen, 2003 DTC 1410, 2003 TCC 674 (Informal Procedure)

Various efforts made by the taxpayer to improve the accuracy of a freight weighing device did not qualify given that there was "some merit" in the Crown expert's contention that the manner in which the taxpayer proceeded was akin to the use of routine or standard engineering practices, it was difficult to understand what hypothesis, if any, was made and what steps were being proposed to eliminate the technological uncertainty if one existed, and virtually no records were kept of any hypotheses tested and of results as the work progressed.

C W Agencies Inc v. The Queen, 2000 DTC 2372 (TCC), aff'd 2002 DTC 6740, 2001 FCA 393

Bonner T.C.J. accepted (at p. 2382) the evidence of the Crown's expert that the cost incurred by a lottery ticket marketer in developing an information system employing object-oriented architecture did not represent SR&ED because "the project used commercially available products and services, and current information systems development methodologies and practices throughout". Bonner T.C.J. also noted (at p. 2381) that "mere size and complexity do not support a conclusion that the work was anything more than routine information systems development".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 96

Knowledge Systems Inc. v. The Queen, 2000 DTC 2353 (TCC)

McArthur TCJ found (at p. 2360):

"What the Appellant did was take existing technology computer hardware and PacRat software, and record personal messages that cannot be understood or tested by anyone else but [its principal]. This does not constitute SR&ED."

Safety Plus Inc. v. The Queen, 99 DTC 537 (TCC)

Two projects for the development of a system for recycling sludge or dealing more economically with the disposition of waste chemicals did not evidence a type of uncertainty that could not be removed by standard engineering practice and routine development and, accordingly, did not qualify.

116736 Canada Inc. v. The Queen, 98 DTC 1816 (TCC) (Informal Procedure)

Before finding that the taxpayer had been engaged in qualifying SR&ED, Archambault TCJ. noted (at p. 1821) that the Act and Regulations "do not require that... written reports be produced in order for a taxpayer to qualify for the deduction of such expenditures: it is possible to adduce evidence by way of oral testimony".

Data Kinetics Ltd. v. The Queen, 98 DTC 1877 (TCC)

The taxpayer, which was engaged in researching and developing advanced data management and memory management software systems for large mainframe computers, and which had adopted the proxy method for calculating SR&ED expenditures, was able to include in s. 37(8)(a)(ii)(B)(I) the cost of a dedicated telephone line that was used to pass instructions and data from the taxpayer's employees in Ottawa (none of whom left Canada) to the staff of an independent company in Birmingham, Alabama whose mainframe computer the taxpayer was leasing for testing purposes. Lamarre TCJ. stated (at p. 1883):

"Testing would not normally be considered as an eligible SR&ED activity. It becomes an eligible activity only when it is required as part of a systematic experimental investigation, which is the case here."

Northwest Hydraulic Consultants Ltd. v. The Queen, 98 DTC 1839 (TCC)

The taxpayer was an engineering consultant firm that specialized in the development, management and protection of water resources. Of the five hydraulic model studies reviewed by Bowman TCJ., four were found to have a sufficient degree of technological uncertainty for the work to qualify as SR&ED. Bowman TCJ enunciated five factors to be considered in SR&ED determinations (at para. 16):

  1. Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
  2. Did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
  3. Did the procedures adopted accord with the established and objective principles of the scientific method, including the formulation, testing and modification of hypotheses?
  4. Did the process result in a technological advancement?
  5. Was a detailed record kept of the hypotheses, tests and results kept as the work progressed?

Telecomsyst Services Inc. v. The Queen, 97 DTC 684 (TCC)

The taxpayer was found not to be engaged in SR&ED given that the only tests conducted by it in the year in question was testing of devices already on the market that had been designed from technologies developed in the United States.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 92

Progressive Solutions Inc. v. The Queen, 96 DTC 1232 (TCC)

Archambault TCJ. accepted the evidence of the taxpayer's expert witness that the development by the taxpayer of a program improved an existing computer process (enabling the taxpayer to produce more efficient high-quality software products) and was the result of systematic investigation (notwithstanding very little documentary evidence of such investigation). Furthermore, the development of a second software program was undertaken directly in support of designing the first program. Accordingly, both activities constituted SR&ED.

ETA Performance Systems Corp. v. MNR, 93 DTC 451 (TCC)

A supposed research project which folded after the initial phases of work and therefore consisted only of routine data collection and research in the educational area did not qualify as scientific research described in Regulation 2900.

Canalerta Technologies Inc. v. MNR, 93 DTC 165 (TCC)

In finding that "thinking, contemplating and meditating" by a researcher did not constitute scientific research and experimental development, Rip J. stated (p. 172):

"... Scientific research contemplates activities which might be based on hypothesis in respect of which the objective is the gaining of knowledge. To obtain that objective, theories must be tested against empirical data ... There is no evidence produced by the appellant to indicate d'Alerta carried on any of his work in nerve and muscle therapy research according to any plan or organized method."

Revelations Research Ltd. v. MNR, 92 DTC 1036 (TCC)

Christie A.C.J. accepted the evidence of the Crown's scientific expert that the proposed research program of the taxpayer was not carried out in any systematic, scientific manner and that the principals involved had no work experience in the central areas of the project. Accordingly, their work did not qualify as scientific research and experimental development.

Sass Manufacturing Ltd. v. MNR, 88 DTC 1363 (TCC)

The taxpayer's appeal failed with respect to the deduction of expenses it incurred in manufacturing a machine in accordance with the engineering design and detailed drawings of a customer not only because the taxpayer had no right to the results of its research and investigation but also because the evidence fell "far short of establishing the existence of any systematic investigation or search carried out in a field of technology by means of experiment or analysis" (p. 1371).

Administrative Policy

6 February 2014 External T.I. 2013-0512191E5 - Mining Activities and SR & ED

CEE excluded even if renounced

An expenditure incurred by a resource corporation which qualifies as Canadian exploration expense cannot be a qualified expenditure in respect of SR&ED by virtue of para. (h) of the definition, notwithstanding that the CEE is renounced. CRA stated that by virtue of such renunciation, the corporation

is deemed not to have incurred the CEE expenses by virtue of paragraph 66(12.61)(b). However, such renounced CEE would still be expenditures incurred with respect to "prospecting, exploring or drilling for, or producing minerals, petroleum or natural gas."

18 September 2013 Draft examples to illustrate key concepts in the Eligibility of Work for SR&ED Investment Tax Credits Policy

CRA provides 10 examples to clarify its position on its SR&ED Investment Tax Credits Policy:

Examples dealing with subheading 2.1.1 ("Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?"):

Example 1 distinction between a technical problem (correcting problem of corroding pump using standard practice) and a technological uncertainty (no existing solution to corrosion problem).

Example 2 technological uncertainty criterion ("There was technological uncertainty in developing a continuous method to process oilseeds at low temperatures because no one knew whether the objective could be achieved...")

Example 3 there can be technological uncertainty in meeting a cost target ("To achieve ... a room-temperature carbon monoxide remover ... the company has to develop an inexpensive process that operates effectively at room temperature.")

Example 4 application of standard techniques does not entail technological uncertainty ("growers are reasonably certain that the techniques, data, and procedures ... would work.")

Example dealing with subheading 2.1.2 ("Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?"):

Example 5 formulation of suitable hypothesis for SR&ED ("The chemist hypothesized that...the use of the new bonding agent ... under the right conditions should increase the bond strength.. .")

Example dealing with subheading 2.1.3 ("Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?"):

Example 6 trial-and-error approach is not SR&ED ("[In] attempting to create the low-calorie pizza ... [t]he only lesson learned from each attempt was that it failed. There was no work at any stage to analyze the results...")

Example dealing with subheading 2.1.4 ("Did the process result in a scientific or a technological advancement?"):

Example 7 innovation is not coterminous with technological advancement ("there was no technological advancement in creating this "glow-in-the-dark" peeler.....[However,] the acquired know-how to develop the new injection molding process represented a technological advancement...")

Example dealing with subheading 2.2.1 (Determine the extent of eligible work - "Support work"):

Example 8 only the portion of project commensurate with SR&ED needs qualifies as such ("the company determined that 500 sticks [compared to a larger order of 2,000 field-hockey sticks] from the cutting and rasping machine would generate sufficient out-of-tolerance sticks to test and validate, with 95% confidence, that the development could be considered complete...")

Example dealing with subheading 2.2.2 (Determine the extent of eligible work - "Excluded work"):

Example 9 distinction between support and excluded work is informed by its purpose ("data collection and testing that the technologist carries out specifically for the chemist's research project are directly in support of SR&ED. However, the data collection and testing the technologist performs on a daily basis ... are excluded.")

Example dealing with subheading 3.2 ("Company project versus SR&ED project"):

Example 10 SR&ED carved out from a larger company project ("the SR&ED project encompasses the work done to miniaturize the specific component, which is a subset of the overall company project.")

19 December 2012 Eligibility of Work for SR&ED Investment Tax Credits Policy, subheading 2.1

In the first step of CRA's two-step analysis of SR&ED ("determine if there is SR&ED" and "determine the extent of eligible work"), CRA sets out five questions, based on the s. 248(1) definition of SR&ED:

Subheading 2.1.1: Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?

[Doubt as to a problem's solution] can arise from a technical problem or from a technological uncertainty, so it is important to make a clear distinction between the two. A technical problem is resolved by applying practices, techniques, or methodologies that are known by the company or available in the public domain. ... On the other hand, a technological uncertainty cannot be resolved using the existing technology base or level and requires experimental development to resolve the problem....The size and complexity of a project by itself does not justify that the work performed in that project falls within the definition of SR&ED. ... However, a form of technological uncertainty called system uncertainty can arise from or during the integration of technologies, the components of which are generally well known. ... The attempt to resolve these uncertainties by a systematic investigation or search can lead to technological advancement.

Subheading 2.1.2: Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?

Here, "hypothesis" means an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea.

Subheading 2.1.3: Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?

In SR&ED, it is expected that a planned approach is formulated; that is:

The need for a systematic investigation does not preclude ideas that result from intuitive processes. Intuitive creativity can give rise to ideas without evident, ordered, rational thought or inference. These ideas can lead to hypotheses for testing that are part of experimental development.

...Solving problems by trial and error is not experiment or analysis within the framework of a systematic investigation or search.

Subheading 2.1.4: Did the process result in a scientific or a technological advancement?

Scientific or technological advancement is the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology. One implication of advancement is that the new knowledge is applicable in a broader sense. That is, the new knowledge could be useful to other situations or circumstances beyond the current project in which the advance was made.

The rejection of a hypothesis is advancement because it eliminates a possible solution....

Process optimization and cost reduction are examples of process development efforts with the objectives of improved efficiencies, better output quality, or financial or strategic advantages. ... If such process optimization efforts do not face and address one or more clearly articulated technological uncertainties, then they are not experimental development.

Subheading 2.1.5: Was a record of the hypotheses tested and the results kept as the work progressed?

It is important to note that this question pertains only to documentation that is naturally produced during the performance of SR&ED. Please refer to Appendix 2 of the latest version of the T4088 Guide to Form T661 Scientific Research and Experimental Development (SR&ED) Expenditure Claim for information on documentation and other evidence to support an SR&ED claim.

19 December 2012 Eligibility of Work for SR&ED Investment Tax Credits Policy, subheading 2.1

Regarding the second step of CRA's two-step analysis of SR&ED ("determine if there is SR&ED" and "determine the extent of eligible work"), CRA states:

Support work must be the following:

19 November 2012 External T.I. 2012-0459351E5 - Shale Gas Well Drilling Classification

In considering the conditions under which a shale gas well would qualify for Canadian development expense credits, CRA noted that drilling the well may qualify for scientific research and experimental development credits if done for "experimental development of a new technology."

Scientific Research and Experimental Development Directorate: "The CRA's perspective on the New SR&ED Claim Form", Tax for the Owner-Manager, Vol. 9, No. 4, October, 2009, p. 1.

Application Policy SR & ED 2002-02R "Experimental Production and Commercial Production With Experimental Development Work - Allowable SR&ED Expenditures".

Application Policy SR & ED 96-09 "Eligibility of Clinical Trials to Meet Regulatory Requirements"

Application Policy SR & ED 96-08 "Eligibility of the Preparation of New Drug Submissions"

Application Policy SR & ED 96-07 "Prototypes, Custom Products/Commercial Assets, Pilot Plants and Experimental Production"

Application Policy SR & ED 96-02 "Tests and Studies Required to meet Requirements in Regulated Industries"

SR & ED 95-03 "Claims for ISO 9000 Registration"

SR & ED 95-02R "Science Eligibility Guidelines for the Oil & Gas of Mining Industries"

SR & ED 95-01R "Linked Activities - Regulation 2900(1)(d)"

IC86-4R3 "Scientific Research and Experimental Development"

IT-151R4 "Scientific Research and Experimental Developmental Expenditures"

Application Policy SR & ED 96-08 "Eligibility of the Preparation of New Drug Submissions"

Application Policy SR & ED 96-07 "Prototypes, Custom Products/Commercial Assets, Pilot Plants and Experimental Production"

Application Policy SR & ED 96-02 "Tests and Studies Required to meet Requirements in Regulated Industries"

IT-151R4 "Scientific Research and Experimental Developmental Expenditures"