A Quick Overview
Most companies organize research and development around products, projects and departmental responsibilities.
Scientific Research and Experimental Development (SR&ED) eligibility, however, depends on the nature of the scientific or technological work performed.
These boundaries do not always align.
A commercial development project may contain several separate technical investigations. Some may qualify for SR&ED, while others involve routine engineering, standard testing or implementation using existing knowledge.
When claim preparation focuses only on the main project objectives, potentially eligible activities conducted by other teams or arising from unexpected problems may not receive a proper assessment.
Five situations deserve particular attention:
- Technical investigations that arise outside the original project plan
- Experimental work performed by supporting engineering teams
- Unsuccessful approaches that are excluded from project summaries
- Research activities that cross departmental boundaries
- Technical work that is difficult to identify from financial records alone
Understanding these situations can help companies assess whether their SR&ED preparation process is capturing the full scope of potentially eligible research.
1. Research Does Not Always Follow the Original Project Plan
A development project typically begins with defined objectives, resources and expected deliverables.
However, the technical work required to achieve those objectives may change.
An engineering team may discover that an established approach does not perform as expected. A biological research program may produce results that cannot be explained using available knowledge. A software system may encounter limitations that were not apparent during initial development.
These situations do not automatically establish SR&ED eligibility.
The important question is whether the work involved an attempt to achieve scientific or technological advancement through a systematic investigation or experimentation.
Consider a company developing an automated production system.
The original project involves designing and installing mechanical equipment to meet specified production requirements.
During integration, the system experiences intermittent timing failures between mechanical components and the control software.
The engineers initially examine known causes, including sensor calibration, communication delays and operating parameters.
If the problem is resolved through established troubleshooting methods, the work would generally be routine engineering.
However, suppose the failures persist and the engineers cannot explain the interaction using available technological knowledge.
They develop alternative explanations, test different control strategies and analyze the resulting system behaviour.
This additional investigation may require a separate SR&ED assessment.
If the annual claim is prepared using only the original mechanical project description, the controls investigation may receive insufficient attention.
The commercial project remained the same. The technical questions being investigated changed.
2. Supporting Engineering Teams May Conduct Separate Investigations
SR&ED activities are not necessarily confined to the department responsible for the main development project.
A mechanical development program may involve controls engineers, software developers, materials specialists and testing personnel.
Each group may encounter different technical problems.
Some activities may directly support an eligible investigation. Others may involve distinct scientific or technological uncertainties that require separate consideration.
For example, a robotics company may develop a new mechanical handling system.
The mechanical design team investigates the behaviour of a component under load.
At the same time, the controls team encounters an unexpected limitation in coordinating movement between multiple actuators.
The software team may also investigate whether an alternative computational approach can resolve a performance limitation that cannot be addressed using established methods.
These activities should not automatically be treated as three separate SR&ED projects.
Their eligibility and relationship to one another depend on the technical objectives, uncertainties and investigations involved.
However, they should not be excluded from consideration simply because they fall outside the main department's project description.
A technical assessment should establish what each group investigated and how its work relates to the scientific or technological advancement being sought.
3. Unsuccessful Work Can Disappear From Project Summaries
Commercial project reports usually emphasize completed milestones, successful solutions and deliverables.
An SR&ED assessment requires a different perspective.
It must examine the investigation undertaken, including approaches that did not produce the expected result.
Consider an aquaculture research program investigating the effect of a modified feeding approach on fish performance.
The researchers begin with a hypothesis about how a particular change will affect biological outcomes.
Initial trials produce inconsistent results under different environmental conditions.
The researchers then examine whether temperature, water chemistry or another variable could explain the observed differences.
Some approaches fail to support the original hypothesis.
Those failures may still be relevant to an SR&ED assessment if they form part of a systematic investigation undertaken to achieve scientific advancement.
However, the fact that a trial failed does not make it eligible.
Routine product testing, standard performance monitoring and experiments that do not seek scientific or technological advancement must still be distinguished from qualifying work.
If the company's annual project summary describes only the final feeding approach, the earlier investigation may be difficult to identify.
The technical records and discussions with the researchers are needed to establish what was investigated and what was learned.
4. Work Across Departments Can Be Difficult to Identify
In larger R&D programs, technical information is often distributed across departments and systems.
A research scientist may document experimental results in a laboratory notebook. An engineer may record equipment modifications in CAD files. A software developer may track technical changes in a repository.
The finance department may see only the corresponding labour costs and project codes.
This creates a practical problem.
Financial records can establish that resources were used on a project, but they generally do not explain whether the underlying activities satisfy the SR&ED eligibility requirements.
Consider a software company developing a computational system.
The development team encounters a performance limitation that cannot be resolved through known optimization methods.
Several engineers investigate alternative approaches, conducting tests to understand the relationship between processing demands, memory use and system behaviour.
The relevant work may appear across development tickets, code revisions, benchmark results and technical discussions.
A project accounting report may show the employees and hours assigned to the development program.
However, it may not distinguish the systematic investigation from routine coding, deployment and maintenance.
The technical work must first be understood before the associated expenditures can be assessed under the applicable SR&ED rules.
5. Project Descriptions May Be Too Broad to Identify Eligible Work
Some companies prepare SR&ED claims using broad descriptions of their development activities.
For example:
- Development of an automated manufacturing system
- Improvement of an aquaculture production process
- Development of a machine learning platform
These descriptions identify the commercial subject of the work.
They do not, by themselves, establish what scientific or technological uncertainty existed or how it was investigated.
A more useful assessment examines the specific technical questions.
What was the company unable to determine using available knowledge?
What approaches were considered?
What experiments or analyses were performed?
What did the results establish?
Where did the systematic investigation begin and end?
Answering these questions may reveal potentially eligible activities that were not apparent from the original project description.
It may also establish that certain work was routine and should not be included.
Both outcomes are important to preparing an accurate claim.
6. How to Identify Work That May Have Been Overlooked
Companies conducting ongoing R&D can improve their assessment process without treating every technical problem as an SR&ED opportunity.
A practical approach begins with the people performing the work.
Speak with the relevant technical personnel
Discuss the problems encountered during the year, including investigations that were not part of the original development plan.
Include supporting technical groups where their work may have contributed to resolving scientific or technological uncertainties.
Examine the progression of the work
Review how technical questions developed, which approaches were tested and what results were obtained.
The final product or successful solution may not explain the full investigation.
Review existing technical records
Laboratory notebooks, engineering revisions, software repositories, test data and meeting notes may help establish the sequence of the work.
These records should be examined in the context of the technical investigation rather than treated as proof of eligibility on their own.
Separate qualifying investigations from routine activities
Routine design, standard testing, implementation and troubleshooting should not be included merely because they occurred within an R&D project.
The assessment must identify the work undertaken to achieve scientific or technological advancement.
Assess the related expenditures
Once the potentially eligible work has been identified, the company must determine which expenditures meet the applicable SR&ED requirements.
Additional technical work does not automatically result in additional eligible costs or a larger claim.
The relevant records, allocation methods and filing requirements must be considered.
7. Why Regular Technical Discussions Matter
A technical investigation is generally easier to understand while the people involved still remember the decisions and results.
Waiting until the end of the fiscal year can make it difficult to reconstruct unsuccessful approaches, changes in direction and the reasons certain tests were performed.
Regular discussions between researchers, engineers and SR&ED specialists can help identify potentially eligible work as it develops.
They also provide an opportunity to distinguish routine activities from investigations that may require further assessment.
This approach does not eliminate the need for a detailed review when the claim is prepared.
However, it can reduce the likelihood that relevant work is omitted simply because it was not included in the original project summary.
Conclusion: Identify the Work Before Assessing the Claim
A complete SR&ED assessment begins with an accurate understanding of the scientific and technological work performed.
Commercial project descriptions, financial reports and final deliverables do not always provide that understanding.
Potentially eligible activities may arise outside the original project plan, involve supporting technical teams or include unsuccessful experimental approaches.
These activities must be assessed against the SR&ED eligibility requirements. They should not be included simply because they were technically difficult or associated with a research project.
The objective is to identify all potentially eligible investigations, establish which activities qualify and support the resulting claim with appropriate technical and financial evidence.
Assess the Full Scope of Your R&D
Checkpoint Research works with Canadian companies to examine the technical activities underlying their SR&ED claims.
Our approach includes recurring discussions with technical personnel and reviews of existing research and development records to identify work that may warrant further SR&ED assessment.
If you would like to discuss how your company identifies and documents eligible R&D, contact our team.
