The Grey Areas of SR&ED: Navigating Borderline Cases

Many potential SR&ED activities fall into a difficult grey zone. These projects involve technical challenges but can’t be immediately deemed SR&ED eligible. When faced with these borderline cases, should you include them in your claim or play it safe and exclude them? The answer often lies in perspective and risk evaluation.

Perspective: The Highest Level View

The Tax Court of Canada has consistently ruled that projects should be evaluated at the highest level. In Les Abeilles Service de Conditionnement Inc. v. The Queen (2014 TCC 313), Justice Jorre noted:

It is important to consider each project globally in the year and not each test individually.

This means you don’t have to evaluate every activity for eligibility. Instead, look for the overall technological uncertainty or problem you are trying to solve. If the work seeks to address the main challenge it can be included.

Example: An engineering firm performing seemingly routine stress calculations might be addressing a higher-level uncertainty about material behavior in novel environmental conditions. The calculations themselves aren't SR&ED but they support the understanding of the material behaviour in the new conditions.

Finding Hidden Advancements

Routine activities can generate data that, with further analysis, reveal eligible SR&ED activity. This extra analysis beyond client requirements can transform routine work into eligible costs.

Turn routine into eligible by:

• Conducting analysis beyond the scope of the immediate deliverable

• Comparing results across multiple projects to identify trends or correlations

• Documenting ideas and your analysis of the data

  
  

Example: A manufacturing company implementing off-the-shelf process improvements notices inconsistent results across production runs. By adding sensors to collect additional data and analyzing performance variables, they uncover relationships between process parameters and operating temperature. This knowledge was previously unknown to the company and their supplier.

Contextual Risk Assessment: Size Matters

When evaluating borderline cases, consider the context of your overall claim:

• Relative size: Is this project small compared to your other clearly eligible work? A small stand-alone project may not be digging in to if the eligibility is not clear.

• Documentation strength: How well can you support the claims of uncertainty (failures, ideas for improvement) and systematic investigation (variables tested, data collected, analysis conducted)? Moderately sized projects may be too risky to claim if they can’t be supported.  

• Project grouping: Can this activity be legitimately combined with other projects addressing similar technological uncertainties? Small activities can improve the content of a related project.

  
  

The CRA applies the concept of "materiality’. This means they're less likely to scrutinize smaller aspects of claims if the overall claim is well-supported. This doesn't mean including ineligible work, rather making reasonable judgments about borderline cases.

Practical Steps for Borderline Projects

1. Reassess from the top: Identify the highest level of technological uncertainty being addressed

2. Group strategically: Combine related activities under a single project umbrella where appropriate

3. Isolate the eligible portion: Separate routine aspects from those addressing technological uncertainty

4. Document the search: Show that solutions weren't readily available (internet searches, supplier communications, expert consultations)

5. Compare risk/reward: Weigh the tax benefits against the risk of review

   
   

Remember that SR&ED isn't about pushing logistical boundaries—it's about recognizing technology improvement, even when it occurs within seemingly routine activities. The grey zone exists because innovation rarely follows a textbook definition. By taking a high level perspective and evaluating risk/reward, you can confidently navigate these borderline cases.

Get Started: If you're struggling to determine whether your projects qualify, book a free consultation today. We'll help you identify eligible activities and build strong, defensible claims.