Trial and Error vs. Systematic Investigation: Where Does Your SR&ED Project Fall?

The phrase "trial and error" often comes up in the SR&ED world, but it means different things to different people. Project leaders use it to describe their iterative process, but the CRA says it doesn't qualify. Thankfully, a recent Tax Court decision, Paveit Construction Inc. v. The King (2025 TCC 129), provides the clearest definition of trial and error yet. More importantly, it reveals that is a spectrum of development. Understanding the factors that influence where your project falls on that spectrum can make or break your claim.

The Paveit Project: Competent Work That Wasn't SR&ED

Paveit Construction developed a process for mobile concrete placement that achieved impressive results. They developed a process that overcame issues with transporting concrete to small, remote sites. They produced higher strength concrete using less water and faster compaction than traditional methods. The company's president, Robert Loroff, demonstrated deep knowledge of concrete chemistry, including hydration processes and crystal formation. By all accounts, this was skilled, sophisticated work performed by competent professionals.

Yet the Tax Court dismissed their SR&ED claim, and the reasoning hinged on the distinction between trial and error and systematic investigation.

What Trial and Error Actually Means

The court's analysis reveals that trial and error means observing problems and reactively adjusting variables as someone competent in the field would. Specifically, the approach lacks a structured framework for understanding why changes work or don't work. Mr. Loroff's own testimony captured this perfectly. When describing their process, he stated there was "a lot of trial and errors" and explained that "we [encountered] the problems, solved the problem, and implemented them as we move forward." He presented the essence of trial and error - reactive problem-solving that moves from issue to solution without the knowledge gain required for SR&ED.

The Spectrum of Investigation

Understanding SR&ED eligibility requires seeing the investigation process as a spectrum rather than a binary choice. On one end sits pure trial and error, on the other, the scientific method. In the business world projects fall somewhere in between.

Pure Trial and Error is characterized by trying available solutions without the rigor required to understand the underlying relationships between variables. The classic example, as noted in CRA guidance, is testing various vendor products to see which performs best. There's no hypothesis about how the solutions could improve performance, just empirical testing of available options. Therefore, the work stays within standard practice without advancing technology.

Paveit's work occupied a middle ground that the court ultimately found insufficient. They understood concrete chemistry and had reasons for their adjustments. When they encountered excess water causing surface tracks, they knew to reduce water content. When surfaces dried out in the heat, they worked faster and sealed quickly. This demonstrates competence and application of industry knowledge. They were applying known principles to optimize results, not investigating technological uncertainty.

Systematic Investigation requires something more structured. The court looks for the formulation of hypotheses before testing, methodical variation of specific parameters while controlling others, and analysis of results. It's expected that documentation will be produced if this approach is followed. Capturing the development on paper allows for that next level analysis and dissemination of the advances.

The Photographer Test

Justice Sorensen introduced an analogy that crystallizes this distinction. He compared Paveit's work to a photographer adjusting aperture, shutter speed, and ISO sensitivity to achieve desired results. A skilled photographer knows how these parameters interact and can optimize them for different conditions. This "Photographer Test" provides a framework for evaluating your own projects. Are you adjusting dials you already understand, or are you pushing beyond known methods?

What Systematic Investigation Requires

The contrast with Manning Canning Kitchens Inc. v. The King shows what moves work from trial and error into systematic investigation. Manning Canning's project involved using a preservative previously applied only in dairy products, in a cold-pressed juice application. This new application meant it's use involved a hypotheses about how it might function in a different environment. Critically, there were known risks to using this preservative in their application.

The Importance of Documentation

Paveit's documentation failures underscore another aspect of the spectrum. When asked about records showing the progression from hypothesis through testing to conclusions, Mr. Loroff admitted only basic journal entries existed. If your investigation is genuinely systematic, documentation should flow naturally from the process. You can't methodically test and analyze a hypothesis without recording your results. The absence of documentation often indicates the absence of systematic investigation, not merely poor record-keeping.

Conclusion

The distinction between trial and error and systematic investigation is about whether you're solving problems reactively as they arise or investigating specific technological uncertainties through structured methodology. Paveit's skilled professionals innovated within known solutions without documenting their process. Taking steps to identify their ideas, structure their trials, and track the results may have pushed the pendulum in their favour. Understanding the factors deciding where your work falls is essential to both documenting your projects and maximizing your SR&ED returns.