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In this revision, the Canada Revenue Agency (CRA) clarifies its position in regards to experimental production (EP) and experimental development (ED) within SR&ED policy to assist in correctly identifying the commercial production (CP) portion of the work that is ineligible for SR&ED claims.
Experimental Production in SR&ED
Within the SR&ED environment, experimental production can usually be defined by two specific items, namely:
- “(…) the output of experimental development that is required to verify whether the technological objectives have been met and/or if a technological advance is achievable;
- (…) purpose of the trial is to evaluate the technical aspect of the project. (…) Accordingly, the resulting sale of the EP is normally only incidental or secondary to the carrying out of ED work.” 1
Thus, for experimental production costs to be a valid SR&ED expenditure, “EP must be required for evaluating or validating the SR&ED project”.1 It is also important to keep in mind that any proceeds resulting in the sale of the experimental production cannot be used to determine the cost of the EP.
Commercial Production with Experimental Development
The CRA recognizes that it is not always black and white when it comes to having the eligibility of SR&ED work tied to the ineligibility of commercial work in regard to when commercial production and experimental development occur concurrently.
Whereas in the best case scenario the claimant can easily differentiate between SR&ED and non-SR&ED work and allocate costs between both types, the CRA also allows for an alternative approach. Since in some cases there is insufficient documentation on the claimant’s part to assist in identifying eligible SR&ED expenditures, the taxpayer can use the alternative approach with assistance from the research and technology advisor (RTA) if they meet all of the following conditions:
- “it is impossible to isolate the SR&ED;
- (…) the RTA is of the opinion that it is appropriate to use such an approach in the context, for e.g., only a portion of the work can be isolated;
- (…) and the claimant agrees with the use of this approach and has signed a waiver of the right to object or appeal under subsection 169(2.2) of the Act.”1
Further details as well as examples of each type of claim can be found here.
1 Source (09/30/2012): http://www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/p2002-02r2-eng.html
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