Guide
What qualifies as SR&ED, in the statute's own words
Updated
Eligibility arguments usually happen in the language of innovation, and the statute does not use that language at all. Reading the definition first makes it much easier to tell a well-framed claim from a hopeful one.
The core test
Subsection 248(1) defines scientific research and experimental development as systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.
Systematic and by means of experiment or analysis are where claims are won and lost. Not novelty, not commercial success, not how impressive the result was. The question is whether there was an investigation carried out in a structured way.
The three limbs
Basic research: work undertaken for the advancement of scientific knowledge without a specific practical application in view. Applied research: the same, with a specific practical application in view.
Experimental development: work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto. Most corporate claims sit here, and the phrase including incremental improvements is the part worth noticing: the advance does not have to be a leap.
Support work
The definition also includes work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of eligible work undertaken in Canada by or on behalf of the taxpayer.
Commensurate with the needs and directly in support are both limiting. Support work is in because the core work needed it, and it is in only to that extent.
The exclusions, which are absolute
The definition does not include work with respect to market research or sales promotion; quality control or routine testing of materials, devices, products or processes; research in the social sciences or the humanities; prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas; the commercial production of a new or improved material, device or product or the commercial use of a new or improved process; style changes; or routine data collection.
These are not factors to be weighed. Work that falls in one of them is out, which is why the commercial production exclusion is the one that most often trims a software or manufacturing claim: the experimental work qualifies and the roll-out of the result does not.
A prospective preparer who cannot tell you which side of that line each part of your project sits on has not yet done the work you are proposing to pay them for.