Updated to Reflect New Policies (2022)
*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022 ***

Eligibility of work for SR&ED recording
Uncovering the little-known sectors that qualify for SR&ED.
In this article, we discuss another sector that is sometimes overlooked in SR&ED: manufacturing (previously, we have discussed agriculture and medicine). Specifically, the CRA lists three types of manufacturing under the umbrella of mechanical engineering:

  • Automotive and transportation engineering and manufacturing.
  • Tooling, machinery, and equipment engineering and manufacturing.
  • Heating, ventilation, and air conditioning engineering and manufacturing.

However, it is possible for manufacturers in other areas to qualify.How is Manufacturing Eligible for SR&ED?You need to meet at least three criteria to qualify for an SR&ED tax credit:

  • You need to have qualified employees with relevant skills who have conducted a systematic investigation or approach.
  • There must be a technological uncertainty to the project —  a “knowledge gap” that cannot be resolved using publicly available knowledge or hiring a specialist.
  • The work must advance your knowledge base, through the generation of new information or discovery of new knowledge.

This means that routine manufacturing or engineering does not qualify for the credit; put another way, work that does not generate new information or knowledge and fails to address an uncertainty (via proving/disproving a hypothesis) may not qualify. Quality control work and commercial production of a new, improved product likely will not qualify, as you are confirming products and/or processes are meeting known standards. Your project should be able to adequately answer the “Five Questions” the CRA uses to determine the eligibility of certain claims:

  • Was there a scientific or technical uncertainty?
  • Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating uncertainty?
  • Was the overall approach adopted consistent with a systemic investigation or search, including formulating and testing hypotheses by means of experiment or analysis?
  • Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
  • Was a record of the hypotheses tested and results kept as the work progressed?1

If you want to know more about these five questions, please refer to our post.Types of manufacturers that may qualify include:

  • Primary, fabricated and nonferrous metal producers.
  • Industrial machinery manufacturers.
  • Aerospace product and parts manufacturers.
  • Plastics material and resin manufacturers.
  • Pulp, paper, and paperboard manufacturers.

Projects that are specifically excluded include any prospecting, exploring or producing minerals, petroleum or natural gas. If you would like to learn more about SR&ED and oil drilling, read our post on that subject.What Manufacturing Work Qualifies for an SR&ED Tax Credit?Some work does fall into the realm of SR&ED, though, including the following:

  • Improving or modifying a process or product.
  • Assembling parts that were not meant to originally fit together.
  • Finishing manufactured products by dyeing, heat-treating, plating and similar operations.
  • Reformatting and adjusting products or changing/updating equipment.
  • Implementing new jigs and fixtures in the production process.
  • Changing production techniques if there are new regulations limiting industrial waste.

Claiming MaterialsYou can claim salaries and subcontractor fees, as well as materials that are used or transformed in an SR&ED process. This includes substances and raw materials that make up the body of a thing at a given moment of the SR&ED process. This means that prototypes can fit that description, and they are usually claimed.The CRA SR&ED Glossary gives definitions for materials “consumed”, “for SR&ED” and “transformed”:

  • Materials for SR&ED. CRA’s interpretation of the term materials for SR&ED is all the raw materials, substances, or other items that compose the body of a thing at a given moment in the SR&ED process. They are classified as either “consumed” or “transformed.”
  • Materials consumed. Materials consumed in the prosecution of SR&ED basically means the material was destroyed or rendered virtually valueless as a result of the SR&ED.
  • Materials transformed. Materials transformed in the prosecution of SR&ED generally means, material for SR&ED, that has been changed or incorporated into another material or product as a result of the SR&ED and the material still has some value either to the claimant or to another party.2

If you are curious about how to claim shipping costs involved in SR&ED manufacturing projects, read our post.Production RunsYou can claim materials that were used in production runs for SR&ED. You will, however, have to:

  • Determine that the production run is required for SR&ED.
  • Identify the section of the commercial facility involved in those production runs.
  • Establish a clear rationale for what part of the production line or process was involved in the SR&ED.
  • Identify the duration of each production run (what period of time was required to evaluate or validate the SR&ED).
  • Identify the personnel who performed the SR&ED.
  • Identify what materials were used in the SR&ED.

However, you do need to establish that there was a technical risk (for instance, you were unsure of how the material would turn out or there was the risk of equipment damage) and you need suitable evidence or records to back up your claim. Such evidence could come in the form of logbooks, meeting minutes, or daily reports. Make sure to read our article about contemporaneous documentation and why it’s so essential.To qualify, the production run must be considered experimental development resulting in experimental production (ED+EP) or experimental development in conjunction or simultaneously with commercial production (ED+CP). In the first instance, your production run could be undertaken to show that your advancement is actually applicable in production. In the second instance, you may make changes to your processes during commercial production to ensure that adverse effects on the material are being negated, if there is no risk to the process or product. Still, the only SR&ED you can claim in this latter instance are those not directly related to creating a salable product. You must apportion the costs between SR&ED and non-SR&ED work in this case.Béton Mobile du Québec Inc.: An ExampleIn Béton Mobile du Québec Inc. v. La Reine, 2020, the Tax Court of Canada judge made some mixed decisions on the nature of the projects that were claimed as SR&ED by BMQ, a concrete company. The judge decided that while six manufacturing projects counted as SR&ED, eight other projects did not.3For the won projects, the judge determined that there was technological uncertainty that couldn’t be overcome with the available information and knowledge. The judge said that impossible for BMQ to predict whether the experience or knowledge generally available or common practices would allow them to overcome the uncertainties linked to the manufacturing of new concrete and mortar mixing products.4However, in the projects that BMQ lost, the judge said that there was no evidence of technological or scientific uncertainty. Hence, because “the scientific or technological uncertainty and scientific or technological advancement criteria were not met,” the SR&ED claims on the eight remaining projects were deemed ineligible.5This case shows how crucial scientific uncertainty is when it comes to determining whether your manufacturing project is SR&ED eligible. If you would like to know more about this specific case, read our full analysis here.Don’t Forget to Review the T4088 AppendixWhen making your claim, do not forget to look at the appendix for the T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661. You will need to select the field of science or technology that best describes the primary field in which the SR&ED project was attempting to achieve an advancement and insert this code into line 206 of the T661 form. The project qualifying for a tax credit may be different from the field of science or technology as the overall company project or business that your company carries out on a regular basis. Failing to fill in this line could impact the eligibility of your application.The codes related to manufacturing discussed in this article are as follows:

  • 03.08 – Automotive and transportation engineering and manufacturing
  • 03.09 – Tooling, machinery, and equipment engineering and manufacturing
  • 03.10 – Heating, ventilation, and air conditioning engineering and manufacturing6

ConclusionManufacturing is an area full of innovation and development. However, due to the nature of manufacturing, one has to be cautious and discern between routine engineering, and SR&ED with special attention towards the aspect of technological or scientific uncertainty and advance the current knowledge base. Of course, if you’re ever uncertain, reach out to a SR&ED consultant who can offer accurate advice for your project.As you can see, there are different types of manufacturing work that can qualify, and it is in your best interest to apply. The SR&ED program is there to help you innovate.Want to learn more about SR&ED? Contact us directly or start a discussion on our LinkedIn group – or better yet, sign up for the Comprehensive Guide to SR&ED.

Updated to Reflect New Policies (2022)
*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022 ***

Show 6 footnotes

  1. SRED. (August 23, 2022). “Are the Five Questions still the SR&ED standard.” Retrieved November 24, 2022 from: https://www.sreducation.ca/are-the-five-questions-still-the-sred-standard/.
  2. Canada Revenue Agency. (August 13, 2021). “SR&ED Glossary.”  Retrieved November 24, 2022 from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html.
  3. Tax Court of Canada. (December 12, 2019). Béton Mobile du Québec Inc. v. La Reine. Retrieved December 31, 2020 from: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/454380/index.do?q=manufacturing+SR%26ED.
  4. Tax Court of Canada. (December 12, 2019). Béton Mobile du Québec Inc. v. La Reine. Retrieved December 31, 2020 from: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/454380/index.do?q=manufacturing+SR%26ED.
  5. Tax Court of Canada. (December 12, 2019). Béton Mobile du Québec Inc. v. La Reine. Retrieved December 31, 2020 from: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/454380/index.do?q=manufacturing+SR%26ED.
  6. Canada Revenue Agency. (December 14, 2020). “T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661” Retrieved December 31, 2020 from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088.html.

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