Are testing costs SR&ED eligible?

Are testing costs SR&ED eligible?

Scientific Research and Experimental Development (SR&ED) work often requires the testing of related processes, materials, and other items in order to test the project’s related hypotheses and to generate technological advancement. In response to inquiries we have received from our clients, we have written this article to answer the question “are testing costs SR&ED eligible?”

SR&ED Eligibility Requirements

The Canada Revenue Agency’s (CRA) new policy ‘Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives’ has simplified the conditions of eligibility into two distinct requirements.

The ‘why’ requirement states that “Work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement.1 Technological advancement is defined in the SR&ED Glossary as “the generation or discovery of knowledge that advances the understanding of technology.2 For a deeper understanding, please see our previous article Technological Advancement: The Core of SR&ED.

The ‘how’ requirement states “Work must be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.”3 Please see our previous article New SR&ED Policy: Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives for a more detailed analysis of this new policy.

Systematic Approach vs. Systematic Investigation

To be eligible for SR&ED tax incentives, a project must be a systematic investigation as opposed to a systematic approach. A systematic investigation includes the following:

  • Generating an idea consistent with known facts, which serves as a starting point for further investigation towards achieving your objective or resolving your problem. Your idea may be expressed as a possible solution to a problem, a proposed method, or an approach. This can be referred to as a hypothesis.
  • Testing of the idea or hypothesis by means of experiment or analysis. The idea can evolve and change as a result of testing.
  • Developing logical conclusions based on the results or findings of the experiment or analysis.
  • Keeping evidence that is generated as the work progresses.4

Where Does Testing Fit into SR&ED?

Testing falls under the definition of support work for SR&ED. Support work is defined by the CRA as:

work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer5

Therefore, testing by itself is not SR&ED; however, it can be considered as part of the SR&ED process if it is commensurate with the needs and directly in support of basic research, applied research, or experimental development work.6

It is important to note that quality control processes and routine testing and data collection are excluded from SR&ED. The purpose of these processes and tests only contribute to the support of normal business operations and are not eligible to claim as support work because they are not carried out specifically for the purpose of performing SR&ED.7 For more information on Quality Control and Routine testing please see our previous article Quality Control and Routine Testing in SR&ED Claims.

Are Testing Costs SR&ED Eligible?

Testing costs are eligible for SR&ED tax incentives; however, they must be completed directly in support of the SR&ED work and fit into the definition of a systematic investigation by being used to test the hypotheses which have been posed. Routine testing, which is completed regularly to support business operations, is not SR&ED eligible. It is important to distinguish between the types and purposes of the testing to ensure accurate expenditures are being claimed.

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Show 7 footnotes

  1. Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives: The “Why” requirement. (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html
  2. SR&ED Glossary: Technological advancement. (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html
  3. Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives: The “How” requirement. (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html
  4. Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives: The “How” requirement. (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html
  5. SR&ED Glossary: Scientific research and experimental development (SR&ED). (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html
  6. Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives: Support work. (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html
  7. Guidelines on the eligibility of work for Scientific Research and Experimental Development (SR&ED) tax incentives: Categories of ineligible work. (2021, August 13). Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines/guidelines-eligibility-work-sred-tax-incentives.html

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