How Observation and Measurement Fit into Systematic Investigation for SR&ED
A problematic misconception has been brought to our attention during a recent Scientific Research and Experimental Development (SR&ED) review. That is the belief that “The practice of ‘observation and measurement’ is a known engineering practice, and therefore all knowledge generated from ‘observation and measurement’ is not SR&ED.” In other words, because observing and measuring are common parts of engineering work, any information learned just from doing them is ineligible for SR&ED. This interpretation is incorrect. According to both the Canada Revenue Agency’s (CRA) policies and established Canadian case law, observation and measurement are not only allowed—they are essential components of the systematic investigation or search required for SR&ED eligibility. In this article, we explain why this thinking is flawed and clarify how these activities contribute to a valid SR&ED claim.
Routine vs. SR&ED Work: Relevant SR&ED Definitions
Observation, measurement, testing, and data collection are not automatically excluded from SR&ED eligibility—they are often essential components of a valid claim. The key distinction lies in why these activities are performed. CRA policy draws a line between work done for routine business purposes and those that directly support experimental development.
To qualify, these activities must “commensurate with the needs” of and directly support the effort to overcome uncertainty. This requirement is only met when the work is part of a systematic investigation or search—a structured process that involves defining a problem, forming and testing hypotheses, and drawing conclusions based on the observed results. Observation and measurement are central to this process because they enable claimants to evaluate outcomes, refine their approach, and ultimately generate new technological knowledge.
Some confusion stems from a rigid or decontextualized application of definitions found in the SR&ED Glossary, such as those for “testing,” “routine data collection,” or “engineering.” These definitions are sometimes applied out of context to reject work that in fact meets the program’s criteria. For example:
- Testing is the application of procedures designed to observe, measure, or verify attributes, properties, or performance. It is ineligible when it is conducted for purposes such as user acceptance, marketability, or compliance—in other words, when it serves normal business functions rather than resolving uncertainty.1
- Data collection is the gathering of information using pre-determined procedures or protocols. It is ineligible when it supports normal business operations.2
- Engineering is the practice of designing, composing, evaluating, advising, reporting, directing, or supervising the construction or manufacturing of tangible products, assemblies, systems, or processes that requires in-depth knowledge of engineering science and the proper, safe, and economic application of engineering principles. It is ineligible when it relies entirely on established techniques without addressing a technological uncertainty.3
Ultimately, it is not the tools or methods that determine eligibility, but the intent, context, and objective—specifically, whether the work seeks to address a underlying scientific or technological uncertainty through a systematic investigation or search.
Observation and Measurement within a Systematic Investigation or Search for SR&ED
Per the CRA, an uncertainty means “whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of [scientific / technological] knowledge.”4 The Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives states that: “the recognition that scientific or technological uncertainty exists marks the starting point for the SR&ED work.“5 Once an uncertainty has been identified the process of experimentation begins in order to achieve technological advancement.
In the Northwest Hydraulic Consultants Ltd. v. The Queen (1998) decision — a cornerstone in SR&ED case law — Justice Bowman first put forth the five questions of SR&ED eligibility. The third of which explicitly acknowledges that systematic observation, measurement, and experimentation are hallmarks of the scientific method:
3. Did the procedures adopted accord with established and objective principles of scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?6
Bowman further elucidates:
“What distinguishes routine activity from the methods required by the definition of SR&ED… is not solely the adherence to systematic routines, but the adoption of the entire scientific method… with a view to removing a technological uncertainty through the formulation and testing of innovative and untested hypotheses.”7
This ruling reinforces that the mere act of measuring or observing is not disqualifying. What matters is why and how those actions are performed. If they are part of a systematic investigation or search aimed at resolving a technological uncertainty, which means “whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of technological knowledge.”8, then they fall squarely within the SR&ED process. Specifically observation and measurement occurs within the “systematic investigation or search” as is called for within the SR&ED program. For more information on all of Justice Bowmans five questions we have analyzed and discussed them in our article “The 5 Questions For SR&ED – Intent and Evolution“.
The CRA defines a Systematic investigation or search as:
“an approach that includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results.”9
Legal Rulings and Systematic Investigation in SR&ED
Several key legal rulings have affirmed that observation and measurement can be part of eligible SR&ED work when tied to a systematic investigation:
6379249 Canada Inc. v. The Queen (2015)
In this case, the CRA denied the Appellant 2009 and 2010 SR&ED claims on the grounds that the technological uncertainties had been fully addressed prior to production and that the second round of work on the printer was routine engineering. The court used Justice Bowmans reasoning and standards set in in their Northwest Hydraulic Consultants Ltd. v. The Queen (1998) decision and affirmed SR&ED eligibility wherein the taxpayer successfully:
- Formulated hypotheses,
- Developed methods to test them,
- Carried out testing and analysis, and
- Iteratively refined their approach based on results.
The court was satisfied that a systematic process was followed, which included measurement and observation. The work was not dismissed as “routine” merely because known techniques were used.
Non-IGS clients can access the full ruling here.
Airzone One Ltd. v. The Queen (2022)
In this case, the Appellant appealed the Minister of National Revenue’s (the “Ministers”) decision in which they disallowed all of the Appellant’s SR&ED Claims for their 2014 and 2015 taxation years on the grounds that the work carried out in connection with the projects did not constitute as SR&ED as defined in subsection 248(1) of the Income Tax Act, Canada (the “ITA”). The judge analyzed each project individually with the 5 questions of eligibility as they were posed within the case of C W Agencies Inc v. The Queen (2001), the “why” and “how” factors explained in the current SR&ED eligibility guidelines, as well as the definition of SR&ED within the ITA to determine whether the Appellant’s activities constituted as SR&ED. The CRA argued that Airzone used standard procedures, but the court disagreed:
“This is an oversimplification… and ignores the novel techniques and challenges it faced.”10
Despite using known observation and testing methods, the work performed by the Appellant involved genuine uncertainty, required iterative experimentation, and led to new knowledge.
Non-IGS clients can access the full ruling here.
Manning Canning Kitchens Inc. v. The King (2024)
In this case, the Appellant appealed the CRAs decision in which they denied the Appellant’s 2017 and 2018 SR&ED claims. The dispute centered around the development of a shelf-stable cold-pressed juice, which Manning Canning argued involved overcoming technological uncertainty. The court agreed that the company faced a true uncertainty that could not be resolved through routine methods or standard procedures. Manning Canning conducted experiments, adjusted formulations, and analyzed results in a systematic way to achieve product stability and the court agreed that the company faced a true uncertainty that could not be resolved through routine methods or standard procedures:
“I therefore conclude, on a balance of probabilities, that in undertaking the development of their cold-pressed juice drink, Manning Canning faced a technological uncertainty that could not be resolved by routine engineering or standard procedure.”11
The ruling confirmed that the Appellant engaged in systematic investigation—defining a problem, forming and testing hypotheses, and drawing conclusions based on results. Despite using known observation and testing methods, the work was not routine; it required iterative testing and problem-solving to generate new knowledge.
Non-IGS clients can access the full ruling here.
The Misapplication of “Known Engineering Practice” Harms Innovation
When CRA reviewers reject claims simply because the company used “observation and measurement,” they risk applying post hoc reasoning—judging the effort only after the results are known. But as the Northwest Hydraulic Consultants Ltd. v. The Queen (1998) ruling reminds us:
“What may appear routine and obvious after the event may not have been before the work was undertaken.”12
This retroactive lens—arguing that the mere use of known methods implies a predictable outcome and thereby confusing correlation with causation—contradicts the reality of SR&ED. In practice, iteration and learning, even when applying established techniques, are often essential to achieve outcomes that are neither known nor guaranteed in advance.
Conclusion
The idea that measurement and observation is not a part of the SR&ED process is misleading, and conceptually wrong. When they are part of a structured effort to resolve technological uncertainty and achieve technological advancement measurement, testing, and observation, are all integral components of a systematic investigation or search as is required in SR&ED.
Companies engaged in SR&ED should focus on clearly documenting their hypotheses, uncertainties, experimental methods, and results in order to fully support their SR&ED claim in case they are selected for review. See our article “Why do I need contemporaneous documentation for SR&ED?” for more information on what contemporaneous documentation is it exactly and how to obtain it while performing SR&ED.
Observation and measurement are not disqualifying features of a project—they are foundational to the SR&ED process when used correctly. If they support resolving technological uncertainty through a systematic process, they are not only acceptable but also essential.