Eligibility of work for SR&ED recording
Uncovering the little-known sectors that qualify for SR&ED: manufacturing

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:

  1. You need to have qualified employees with relevant skills who have conducted a systematic investigation or approach.
  2. There must be a technological uncertainty to the project —  a “knowledge gap” that cannot be resolved using publicly available knowledge or hiring a specialist.
  3. 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.

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.

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 Materials

You 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.

Production Runs

You 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.

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.

One Recent Manufacturing Court Case

Just because you can try to claim a manufacturing expense, however, that doesn’t mean you will always succeed. In one recent Tax Court of Canada case, Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen, Joel Theatrical Rigging Contractors (1980) (the appellant) tried to solve two problems with regards to how theatrical rigging was designed and manufactured. These related to how certain curtains they provided to theatre companies would drop. They were also trying to figure out how to make a cheaper drop system in one case.

The court found, however, that the company failed to provide evidence that the projects fell within the scope of SR&ED work. Instead, the judge found that this was merely routine engineering, which does not qualify. Part of the problem was with documentation — the company had gotten rid of its notes and drawings to support their claim. Thus, it goes without saying that if you do feel that you have a legitimate SR&ED claim that could be challenged by the CRA, you should make and retain proper documents and notes.

Don’t Forget to Review the T4088 Appendix

When 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 manufacturing


Despite the failure of Joel Theatrical Rigging Contractors (1980) (as shown above) to obtain their SR&ED tax credit for work in designing and manufacturing, that should not give you pause to submit a claim, provided that your work meets all of the mandatory criteria.

As you can see, there are different types of manufacturing work that can qualify, and it is in your best interest to apply. You might get a sizable amount of money back for making something truly innovative.

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