SR&ED While Manufacturing

How Do You Distinguish What Qualifies for SR&ED When Your Project Involves Commercial Production?

When developing a new product or process in manufacturing, you will eventually need to test at full-scale and transition to commercial production. You can still claim SR&ED during this period, but the eligible work must be separated from commercial production. Identifying and supporting what you can claim can be complicated, but adhering to the SR&ED eligibility criteria will provide clarity.

Understanding SR&ED Eligibility

SR&ED is a tax credit program designed to incentivizing companies to undertake risky development projects. The work must aim to resolve a technological uncertainty. This uncertainty is often evident early in the project, where the focus is on prototyping and small-scale testing. However, as the project progresses, you will need to test your development at full-scale, and you may even begin selling some product. While this might suggest that the SR&ED portion has concluded, the significant costs involved justify a closer examination.

Risk as the Key Criteria

Risk is essential to a qualifying SR&ED project. It defines the technological uncertainty and should be present throughout the systematic investigation. To identify the risks involved in a full-scale trial, consider the following questions:

• How do the full-scale conditions differ from your testing so far?

• What issues do you anticipate based on small-scale testing or prior experience?

• Do you expect to sell any product from the trial?

• What additional measures need to be implemented—extra staff, testing, etc.?

  
  

Answering these questions before the trials begin will help determine where and when the technological uncertainty exists. This, in turn, will allow you to define the eligible work.

Experimental Production vs. Commercial Production

Production trials can fall into three categories:

• Experimental Development (ED) + Experimental Production (EP)

• Experimental Production (EP) + Commercial Production (CP)

• Commercial Production (CP)

Category	Risk	SR&ED Costs
ED + EP	Throughout	All
EP + CP	Portion	Incremental
CP	Resolved	None

The key criteria for distinguishing which category your work falls into is risk.

• ED + EP: When risk is present throughout the process, you can claim all personnel and material costs. This applies when significant issues remain unresolved, and extra measures are implemented (e.g., technical staff, testing, slower production). There is no expectation of producing sellable product (though some may result). For example, you may have developed a prototype, but your existing process struggles to produce it due to incompatible materials, complex assembly, or parameters outside typical operation. Initial runs may be slow or incomplete, and all products may be destructively tested.

• EP + CP: When risk is limited to a portion of the production, you can only claim the personnel and material costs exceeding typical commercial activity. You expect to produce some sellable product, but changes made may cause failures. Examples include running a prototype alongside commercial products or implementing process changes likely to increase scrap.

• CP: When risks have been resolved, and you can successfully sell the product, it is assumed that technological uncertainty no longer exists, and the SR&ED portion has ended. There will likely be a transition from experimental to commercial production over the course of the trial. Defining the endpoint at the start of the trial will help support the portions you claim.

Documenting Experimental Production

Proving that risk was present during a trial can be challenging. The CRA will require contemporaneous evidence if you are claiming the significant costs of a production run. Therefore, it is crucial to document your intentions before the trial, including objectives, known risks, and the personnel involved. During production, take photos and make detailed notes. This will save time when preparing and defending your SR&ED claim and ensure all eligible costs are captured.

Summary

Distinguishing between eligible experimental production (EP) and ineligible commercial production (CP) is critical for SR&ED claims in manufacturing. While commercial production is explicitly excluded from SR&ED tax credits, full-scale trials may still qualify if they address unresolved technological uncertainties. Risk is the key criterion for eligibility, and documenting your experimental process is essential to substantiate your claim. By clearly defining risks, planning experiments, and maintaining thorough records, you can maximize your SR&ED claim while ensuring compliance with CRA requirements.

Navigating the complexities of SR&ED eligibility, especially when commercial processes are involved, requires a clear understanding of the program’s criteria and meticulous documentation. By focusing on technological uncertainty, distinguishing between experimental and commercial production, and thoroughly documenting your process, you can confidently identify and claim eligible SR&ED expenses. If you’re unsure about your project’s eligibility, consider consulting an SR&ED expert to ensure you’re maximizing your claim while staying compliant with CRA guidelines.