SR&ED Glossary

Date: August 13, 2021

The scientific research and experimental development (SR&ED) glossary is provided for information purposes only as a plain language explanation of some of the terms used on the SR&ED Web pages, policies, forms and guides, when administering the SR&ED legislation under the federal Income Tax Act and the Income Tax Regulations. The SR&ED Glossary does not replace the law, either enacted or proposed.

• A
• B
• C
• D
• E
• F
• G
• H
• I
• J
• K
• L
• M
• N
• O
• P
• Q
• R
• S

• T
• U
• V
• W
• X
• Y
• Z

A

Adjusted selling cost

For the purpose of calculating qualified SR&ED expenditures adjusted selling costs involves the tracing of the costs incurred by non-arm's length (NAL) parties in providing a property such that there will be no inter-company profit included in the cost of the property to the performer. The cost to the party performing the SR&ED will be the cost incurred by the NAL party who acquired the property at arm's length.

Adjusted service cost

For the purpose of calculating qualified SR&ED expenditures, adjusted service cost involves the tracing of the costs incurred by non-arm's length (NAL) parties in rendering a particular service such that there will be no inter-company profit included in the cost of the service to the performer. The cost to the party performing the SR&ED will be the cost incurred by the supplier of the service by the NAL party who rendered the particular service to the performer (the cost incurred by the supplier of the service will also be adjusted if it includes the cost of a service rendered by a party dealing at NAL to that supplier).

Advancement of scientific knowledge / scientific advancement

Advancement of scientific knowledge / scientific advancement is the generation or discovery of knowledge that advances the understanding of science.

For more information, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Agricultural check-offs

Agricultural check-offs are contributions made to agricultural organizations that fund SR&ED.

The Canada Revenue Agency (CRA) allows farm producers to earn investment tax credits (ITCs) on contributions made to agricultural organizations that fund SR&ED. For the producers to receive the ITC under the ITA, the agricultural organization may act as an agent for the producers in matters relating to SR&ED. In effect, all SR&ED transactions by agricultural organizations will constitute a transaction made by producers.

For more information please refer to section 8.0 of the Third-Party Payments Policy.

All or substantially all (ASA)

All or substantially all (ASA) means 90% or more.

Analysis

Analysis is the detailed examination of information to differentiate the various parts of a whole, determine their attributes, or explain their relationships. It is performed against the background of available knowledge and experience and it involves using tools such as models, graphs, statistics, tables, diagrams, mathematical formulas, and computer programs to express this knowledge or experience. Analysis is an integral part of the systematic investigation or search and it can be used to generate or test a hypothesis.

Note
The following is the explanation of changes to this term as of April 24, 2015.

1. “systematic investigation or search” replaced “scientific method” as the latter is no longer used in policy.

Applied research

Applied research is work undertaken for the advancement of scientific knowledge with a specific practical application in view.

Arm's length

Arm's length refers to a situation where two parties that deal with each other are not related to each other and no control exists between them. It is a question of fact whether two parties not related to each other are dealing with each other at arm's length.

For more information, please refer to Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.

Available for use

Generally, an asset is considered to become available for use and eligible for capital cost allowance and investment tax credit (ITC) at the earliest of:

• the time at which the property is first used by the claimant for the purpose of earning income; or
• the time the property is delivered or is made available to the claimant and is capable of producing a saleable product or to perform a commercially salable service.

For more information, please refer to the T2 Corporation – Income Tax Guide.

B

Basic research

Basic research is work undertaken for the advancement of scientific knowledge without a specific practical application in view.

Basic SR&ED investment tax credit rate (15%)

The basic rate of an SR&ED investment tax credit (ITC) is 15% for tax years that end after 2013 and 20% for tax years that end before 2014. For tax years that include January 1, 2014, the reduction in the basic ITC rate is pro-rated based on the number of days in the tax year that are after 2013.

The following types of claimants will earn ITCs at the basic ITC rate on qualified SR&ED expenditures:

• corporations (other than certain Canadian-controlled private corporations (CCPC));
• sole proprietorships (individuals);
• partners of a partnership;
• beneficiaries of trusts.

Beta site testing

Beta site testing is the testing or validation of a product or process in a customer or an end-user facility or environment. Often, the need for this type of testing arises when the product or process that is being developed cannot be tested in isolation without the full process environment, or in cases where the developer is unable to simulate the specialized environment or conditions required to evaluate the product performance.

While beta site testing is a commonly used term, depending on the industry or technology involved, other terms may be used to characterize the type of testing discussed above. These terms include for example, field testing, field investigation, field trials, validation, offsite testing, consumer testing, in-situ testing, end-use testing, final verification, or on-orbit or on-mission testing. The CRA uses the term beta site testing in a generic sense to refer to all of the above terms.

C

Canadian-controlled private corporation (CCPC)

For more information on CCPC and other types of corporations, please refer to the following CRA web page, Types of corporations.

Claim preparer (for the purposes of claim preparer information)

A claim preparer of an SR&ED form means a person or partnership who agrees to accept consideration to prepare, or assist in the preparation of, the form but does not include an employee who prepares, or assists in the preparation of, the form in the course of performing their duties of employment. For this purpose, an SR&ED form is a prescribed form required to be filed under subsection 37(11) of the Income Tax Act, which is the Form T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

Commensurate with the needs

Within the context of SR&ED, work that is commensurate with the needs must be corresponding in the amount, size, extent, or duration that is necessary to carry out basic research, applied research, or experimental development.

Commercial asset

A commercial asset is an asset that is developed for the purpose of being used within the company’s own business. It is constructed to meet the company’s own requirements.

For more information, please refer to the SR&ED while Developing an Asset Policy.

Commercial plant

A commercial plant is a production facility used for commercial (or other non-SR&ED) purposes. Although new plants may sometimes be built or existing commercial plants may be modified, to test and demonstrate new processes, these plants are generally not pilot plants as their intended purpose and actual use is commercial.

For more information, please refer to the SR&ED while Developing an Asset Policy.

Commercial production

Commercial production is work associated with producing materials, devices, and products, intended for sale or business operations. It is expected that a profit will be made.

The definition of SR&ED states that “work with respect to… the commercial production of a new or improved material, device or product or the commercial use of a new or improved process” is not included in the meaning of SR&ED.

Computer programming

Computer programming is preparing and coding operating instructions for a computer.

Context of the production run

Context of the production run refers to the circumstances under which the production run is carried out. When experimental development work is performed during a production run, the context of that production run must be established since the allowable SR&ED expenditures vary depending on that context. In other words, the circumstances surrounding that production run will determine how the expenditures are treated. When experimental development work is performed during a production run, the context of the production run can be ED+EP or ED+CP .

For more information, please refer to the SR&ED During Production Runs Policy.

Contract payment

A contract payment is:

• an amount paid or payable to a claimant by a taxable supplier in respect of the amount for SR&ED:
  • for, or on behalf of, a person or partnership entitled to a deduction for the amount as a current expenditure or as a third-party payment to a corporation; and
  • at a time when the claimant and the person or partnership (the taxable supplier) are dealing at arm's length; or
• an amount for an expenditure of a current nature (other than a prescribed amount) payable by a Canadian government, municipality or other Canadian public authority or by a person exempt from Part I tax, for SR&ED to be performed for it or on its behalf.

Custom product

A custom product is an asset that is developed for the purpose of subsequently being sold. It is constructed to meet customer specifications or market-driven technical requirements.

For more information, please refer to the SR&ED while Developing an Asset Policy.

D

Data collection / routine data collection

Data collection is the gathering of information using pre-determined procedures or protocols. The term routine data collection refers to data collection that is carried out for supporting normal business operations, and it is excluded from SR&ED work. Only the data collection work that is commensurate with the needs and directly in support of basic research, applied research or experimental development is eligible.

Depreciable property

Depreciable property is any property for which the claimant would be allowed to claim capital cost allowance.

Design

Design is work to transform concepts and ideas into a plan.

Directly attributable to the prosecution of SR&ED

An expenditure of a current nature is directly attributable to the prosecution of SR&ED if it is:

• the cost of materials consumed or transformed in such prosecution (please refer to the Materials for SR&ED Policy);
• for an employee who directly undertakes, supervises or supports the prosecution of SR&ED that would be, the portion of salaries or wages incurred, to the extent the amount can reasonably be considered in respect of such prosecution (please refer to the SR&ED Salary or Wages Policy) ; and
• for other expenditures that are, an expenditure, or portion of an expenditure, that is directly related to the prosecution of SR&ED and that would not have been incurred if such prosecution had not occurred. For more information on other expenditures (please refer to the SR&ED Overhead and Other Expenditures Policy).

Directly attributable to the provision of premises, facilities or equipment for the prosecution of SR&ED

The following expenditures are directly attributable to the provision of premises, facilities or equipment for the prosecution of SR&ED in Canada:

• the cost of the maintenance and upkeep of such premises, facilities or equipment; and
• other expenditures, or those portions of other expenditures, that are directly related to that provision and that would not have been incurred if those premises or facilities or that equipment had not existed (incremental).

For more information, please refer to the SR&ED Overhead and Other Expenditures Policy.

Directly engaged in SR&ED

Directly engaged in SR&ED refers to hands on work. Whether an employee is directly engaged in SR&ED is based on the tasks that are performed and not on the job title of the employee. For a list of tasks to be considered as directly engaged, see Table 3 in the T4088, Guide to Form T661 Scientific Research and Experimental Development (SR&ED) Expenditure Claim.

For more information, please refer to section 7.1 of the SR&ED Salary or Wages Policy.

Directly in support

Within the context of SR&ED, work that is directly in support is work that was carried out specifically to perform the related basic research, applied research or experimental development.

Directly related to the prosecution of SR&ED

To be directly attributable to the prosecution of SR&ED in Canada under the traditional method, an expenditure, or a portion of the expenditure, must first be an expenditure directly related to the prosecution of SR&ED in Canada.

For an expenditure to be considered directly related to the prosecution of SR&ED, the expenditure must connect with (that is, be related to) the SR&ED work, the SR&ED staff, or the machinery / equipment used by staff to perform SR&ED, and there must be no intervening step or intermediary between these elements and the expenditure (that is, directly). In other words, there must be a direct linkage of the expenditure to specific SR&ED work, staff, or machinery/equipment. Whether an expenditure is directly related to the prosecution of SR&ED is a question of fact.

If the expenditure is directly related to the prosecution of SR&ED in Canada and also incremental to such prosecution, it can be claimed as SR&ED overhead and other expenditures.

For more information, please refer to section 3.1 of the SR&ED Overhead and Other Expenditures Policy.

E

ED+CP (experimental development in conjunction or simultaneously with commercial production)

ED+CP refers to the context of the production run when experimental development work is carried out in conjunction or simultaneously with commercial production. When scientific research and experimental development (SR&ED) is involved in a production run, but the context of that production run is not ED+EP , the context of the production run must be ED+CP.

For more information, please refer to the SR&ED During Production Runs Policy.

ED+EP (experimental development resulting in experimental production)

ED+EP refers to the context of the production run when experimental development work is carried out resulting in experimental production.

For more information, please refer to the SR&ED During Production Runs Policy.

Engineering

Engineering is the practice of designing, composing, evaluating, advising, reporting, directing, or supervising the construction or manufacturing of tangible products, assemblies, systems, or processes that requires in-depth knowledge of engineering science and the proper, safe, and economic application of engineering principles.

By definition, and according to sound professional practice, engineering practice does not involve scientific or technological uncertainty and is thus not eligible on its own. However, engineering work that is commensurate with the needs and directly in support of basic research, applied research, or experimental development is eligible.

It is important to distinguish between work with respect to engineering and the work that engineers perform. Even though engineering practice is not eligible on its own, engineers can still be carrying out basic research, applied research, and experimental development.

Note
The following are the explanation of changes to this term as of April 24, 2015.

1. “routine engineering” was removed as there is no differentiation between engineering and routine engineering.
2. A paragraph was added to clarify that even though engineering practice on its own is not eligible, engineers could still be performing basic research, applied research, or experimental development.

Enhanced SR&ED investment tax credit rate (35%)

Some Canadian-controlled private corporations (CCPCs) that meet certain requirements may earn investment tax credits at the enhanced rate of 35% (20% basic rate + 15% enhancement – before 2014) and (15% basic rate + 20% enhancement – after 2013). This enhanced rate may be earned on their qualified SR&ED expenditures up to a maximum threshold of $3 million. The qualified SR&ED expenditures in excess of the expenditure limit for the tax year earn ITC at the basic rate.

For more information, please refer to the SR&ED Investment Tax Credit Policy.

Excess production

Any production beyond what is required for the SR&ED is called excess production.

Excluded work

The work identified in paragraphs (e)-(k) of the definition of SR&ED is typically referred to as excluded work and, collectively, these paragraphs are referred to as the exclusions. This work is not SR&ED.

Expenditure of a capital nature

Expenditures of a capital nature are those expenditures that result in the acquisition of capital property, which is depreciable property or property that would result in a gain or loss if disposed. The comments in the current version of Interpretation Bulletin IT-128R, Capital Cost Allowance – Depreciable Property, may be of assistance in determining whether a particular property is depreciable property.

Expenditure of a current nature

Expenditures of a current nature made before 2014 are considered to be those expenditures that do not result in the acquisition of land, a leasehold interest in land, or property that would otherwise be depreciable property to the taxpayer.

For SR&ED purposes, expenditures of a current nature made after 2013 include any expenditures made by the claimant other than an expenditure for:

• the acquisition of capital property of the claimant, or
• the use of, or the right to use, capital property, that would be capital property of the claimant if the capital property were owned by the claimant.

Experiment

An experiment is the test of a hypothesis under controlled conditions.

Experimental development

Experimental development is 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.

Experimental production

Experimental production is defined as the production output of experimental development that is required to verify whether the objectives of the SR&ED work have been met or if a technological advancement is achievable. The purpose of the production run, in which the output is experimental production, is to evaluate the technical aspects of the SR&ED project.

F

Filing-due date

The income tax return filing-due date for a tax year is the day on or before which a income tax return under Part I of the ITA is required to be filed for the year or would be required to be filed if tax under Part I of the ITA was payable.

For more information, please refer to section 5.0 of the SR&ED Filing Requirements Policy.

First term shared-use-equipment

To qualify as first term shared-use-equipment, a property must be:

• depreciable property;
• acquired after December 2, 1992, and before January 1, 2014;
• equipment that does not meet the ASA criteria for SR&ED capital expenditures;
• equipment that is not prescribed depreciable property (PDP);
• equipment other than general purpose office equipment or furniture (GPOEF);
• new equipment (the equipment must not have been used or acquired for use or lease, or for any other purposes before the claimant acquired it); and
• equipment that is used by the claimant during its operating time in the period starting with the time the equipment was acquired and available for use, and ends at the end of the first tax year that was at least 12 months after the time the equipment was acquired and available for use, and was used primarily for the prosecution of SR&ED in Canada.

For more information, please refer to the SR&ED Shared-Use-Equipment Policy.

G

General-purpose office equipment or furniture (GPOEF)

General-purpose office equipment of furniture (GPOEF) includes all furniture, such as desks, chairs, lamps, filing cabinets, and bookshelves. It also includes photocopiers, fax machines, telephones, pagers, and calculators.

Computers, including hardware, software, and ancillary equipment, are not considered to be general‑purpose office equipment or furniture.

Government assistance

Government assistance is defined in the ITA as assistance from a government, municipality, or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance, or any other form of assistance other than the federal investment tax credit (ITC).

Government assistance also includes assistance provided by a crown corporation or a foreign government.

For more information, please refer to the Assistance and Contract Payments Policy.

H

Humanities

The humanities are branches of knowledge that concern human beings and their culture or analytic and critical methods of inquiry derived from an appreciation of human values and the unique ability of the human spirit to express itself.

As a group of educational disciplines, the humanities are distinct in content and method from the physical and biological sciences and, somewhat less decisively, from the social sciences. The humanities include the study of all languages and literatures, the arts, history, and philosophy.

Work with respect to research in the humanities is specifically excluded from the definition of SR&ED.

Note

The following are the explanation of changes to this definition as of April, 2017.

1. The definition has been simplified to improve understanding and clarity

Hypothesis

A hypothesis is an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea.

Note
The following are the explanation of changes to this term as of April 24, 2015.

1. The explanation has been simplified to improve understanding and readability.

I

In Canada (for SR&ED expenditures)

Subsection 37(1.3) of the ITA provides that scientific research and experimental development (SR&ED) expenditures that are incurred, in the course of a business otherwise carried on by a taxpayer in Canada, in the zone identified by the Oceans Act as the exclusive economic zone (EEZ) of Canada (or in the airspace above or the subsoil or seabed below that zone) will be considered to have been incurred by the taxpayer in Canada. Generally, the Oceans Act provides that the EEZ of Canada consists of the area that is up to 200 nautical miles from the Canadian coastline. Coastline refers to the low-water line along the coasts of Canada.

Incremental (expenditure)

Incremental means that the expenditure would not have been incurred if SR&ED had not occurred.

For more information, please refer to section 3.2 of the SR&ED Overhead and Other Expenditures Policy.

Investment tax credit (ITC)

An investment tax credit (ITC) may be earned in respect of various investments or expenditures. The definition of ITC within the Act determines the amount of ITC that is available to a taxpayer at the end of a tax year. There are additional provisions in the Act that adjust the ITC amount available to the taxpayer at the end of a particular tax year.

Unless otherwise noted, any reference to ITC within the SR&ED program is a reference to an ITC earned on qualified SR&ED expenditures.

For more information please refer to the SR&ED Investment Tax Credit Policy.

Investment tax credit (ITC) applied

Investment tax credit (ITC) applied refers to an ITC amount the taxpayer applied against Part I tax otherwise payable.

For more information, please refer to the SR&ED Investment Tax Credit Policy.

Investment tax credit (ITC) carryback

Investment tax credit (ITC) carryback refers to an ITC amount the taxpayer earned in a tax year and carried back and applied against Part I tax otherwise payable in any of the 3 previous tax years.

For more information, please refer to the SR&ED Investment Tax Credit Policy.

Investment tax credit (ITC) carryforward

Investment tax credit (ITC) carryforward refers to an ITC amount the taxpayer has not applied, refunded, or carried back that can be carried forward and applied against Part I tax otherwise payable in a subsequent tax year. The carry-forward period is generally 20 tax years. The ITC expires if it is not applied to reduce Part I tax otherwise payable within the applicable number of tax years.

For more information, please refer to the SR&ED Investment Tax Credit Policy.

Investment tax credit (ITC) recapture

The ITC recapture rules will reverse all or a portion of the SR&ED ITC earned by adding an amount to a claimant's tax payable for the year in which the sale or conversion to commercial use of an SR&ED property takes place.

For more information, please refer to the Recapture of SR&ED Investment Tax Credit Policy.

Investment tax credit (ITC) refund

The investment tax credit (ITC) of certain claimants that is not applied against Part I tax otherwise payable, or carried back to a previous tax year and applied against Part I tax otherwise payable in the previous tax year, may be refundable. In this context, the term refundable goes beyond a reimbursement of Part I tax already paid and refers to the credit that is reimbursed to the claimant.

For more information, please refer to the SR&ED Investment Tax Credit Policy.

K

Key individuals

Key individuals are individuals who are directly involved in the project and are essential to the progress of the project. These are individuals who will have a good understanding of the scientific or technological aspects of the project.

M

Market research

Market research is the process of gathering and analyzing information for the purpose of marketing a specific product, especially a new or proposed product.

Market research is a major discipline of marketing whose main function is intelligence gathering and analysis on a particular market, industry, geography, customer group, competitors, or specific product or service area.

The main uses of market research are: to position a business or strategic program; to assist in new product or service launches; to evaluate a product or service's strengths and weaknesses to help determine how to improve a product or service; to determine customer wants, needs, and desires; and to analyze competition.

Market research includes work such as:

• examining such factors as buying habits, use of leisure time, consumer needs or wants, and attitudes toward existing products and new products being test-marketed;
• market development and market verification;
• general market identification;
• market demonstration;
• identifying market preference;
• developing customer acceptance;
• gathering and evaluating data about consumers' preferences for products and services; and
• studying the requirements of specific markets, the acceptability of products, and methods of developing and exploiting new markets.

Work with respect to market research is specifically excluded from the definition of SR&ED .

Materials consumed

Materials consumed in the prosecution of SR&ED basically means the material was destroyed or rendered virtually valueless as a result of the SR&ED.

For more information, please refer to section 5.0 of the Materials for SR&ED Policy.

Materials for SR&ED

CRA's interpretation of the term materials for SR&ED is all the raw materials, substances, or other items that compose the body of a thing at a given moment in the SR&ED process.

For more information, please refer to the Materials for SR&ED Policy.

Materials transformed

Materials transformed in the prosecution of SR&ED generally means, material for SR&ED, that has been changed or incorporated into another material or product as a result of the SR&ED and the material still has some value either to the claimant or to another party.

For more information, please refer to section 6.0 of the Materials for SR&ED Policy.

Mathematical analysis

Mathematical analysis is the examination of a set of observations by means of mathematical tools, principles, methods, or techniques.

N

Non-arm's length (NAL)

Non-arm’s length refers to a situation where two related parties that deal with each other and one party exerts control over the other. In other words, the parties are not dealing at arm's length.

Non-government assistance

Non-government assistance is an amount that is received as an inducement, refund, reimbursement, contribution, allowance, grant, subsidy, forgivable loan, deduction from tax, or any other form of assistance.

For more information, please refer to the Assistance and Contract Payments Policy.

O

On behalf of (SR&ED undertaken)

When SR&ED carried out in Canada is undertaken on behalf of a claimant, this normally refers to a situation where the SR&ED work is contracted out to another party under circumstances where the claimant (the payer) typically maintains ownership of the SR&ED work performed.

Whether the payer requested the contractor to perform SR&ED on behalf of the payer under the terms of the contract is a key element for determining an amount as being a contract payment. This determination is made on the basis of the terms of the contract read as a whole and by reviewing all the facts surrounding the particular situation.

Operating time

The term operating time is not defined in the ITA but, generally, operating time means the time the equipment usually runs or functions during the tax year.

For more information, please refer to section 4.2 of the SR&ED Capital Expenditures Policy.

Operations research

Operations research is an approach involving the mathematical treatment of a process, problem, or operation to determine its purpose and effectiveness, and to gain maximum efficiency.

Overhead and other expenditures

Within the context of the SR&ED Program, the term overhead and other expenditures is often used to refer to certain expenditures of a current nature that are directly related to the prosecution of SR&ED in Canada and that are incremental, or to certain expenditures that are directly attributable to the provision of premises, facilities, or equipment for the prosecution of SR&ED in Canada.

For more information, please refer to the SR&ED Overhead and Other Expenditures Policy.

P

Pilot plant

A pilot plant is a production facility that is developed for the primary purpose of carrying out SR&ED during its useful life. It is used solely for its technical or experimental content and not for the purposes of commercial operations.

A pilot plant is a non-commercial scale plant in which processing steps are systematically investigated under conditions simulating a full production unit. Usually, it is used to obtain engineering and other data needed to evaluate hypotheses, establish finished product technical specifications, write product or process formulae, or design special equipment and structures that are required by a new or improved fabrication process.

More specifically, when carrying out SR&ED, pilot plants may be used to study the behaviour of certain raw materials, develop an economically viable manufacturing process, modify equipment for new applications, test unproven equipment, test new conditions, produce samples for research, or determine environmental effects.

For more information, please refer to the SR&ED while Developing an Asset Policy.

Pool

The term pool refers to a tax mechanism whereby an amount (the pool) is calculated by identifying additions and reductions to the balance.

Pool of deductible SR&ED expenditures

It is possible to pool expenditures of a current nature (and expenditures of a capital nature incurred prior to January 1, 2014) on SR&ED carried out in Canada, and deduct them when calculating the income from a business you carried on in the tax year you made the expenditure or in any later tax year. A negative balance is usually brought into income, and a positive balance (or portion thereof) may usually be deducted from income.

For more information, please refer to the Pool of Deductible SR&ED Expenditures Policy.

Prescribed depreciable property (PDP)

The depreciable property of a claimant that is prescribed for the purposes of the definition first term shared-use-equipment is:

• a building of the claimant;
• a leasehold interest of the claimant in a building;
• a property or part of a property of the claimant if, at the time the part was acquired by the claimant, the claimant or a person related to the claimant intended that the part would be used in the prosecution of SR&ED during the assembly, construction, or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes (other than SR&ED), and intended:
  • that it would be used during its operating time in its expected useful life primarily for purposes other than SR&ED; or
  • that its value would be consumed primarily in activities other than SR&ED.

Prescribed expenditures

Prescribed expenditures within the meaning of the Regulations are not qualified SR&ED expenditures and, therefore, do not earn investment tax credit (ITC).

For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Prescribed information

Prescribed information is the information to be provided on a form or the manner of filing a form as authorized by the Minister of National Revenue. For more information, please refer to section 4.0 of the SR&ED Filing Requirements Policy.

Prescribed proxy amount (PPA)

The prescribed proxy amount is a notional amount on which SR&ED ITC can be earned. It is calculated as a percentage of a salary base. The PPA is only applicable when the claimant elects to use the proxy method.

The PPA is used in lieu of actual SR&ED overhead and other expenditures when calculating qualified SR&ED expenditures to earn SR&ED ITC. The PPA is not included in the pool of deductible SR&ED expenditures.

For more information, please refer to the Prescribed Proxy Amount Policy.

Primarily

For SR&ED purposes, the term primarily means more than 50% but less than 90%.

Production

Generally, production refers to the output from the process as well as the act of operating the process.

Production output

Production output refers to the output from the process (in other words, the product).

Production run

In a commercial environment, companies run processes and equipment for certain periods of time in order to achieve specific objectives. This is generally referred to as a production run. For example, a production run could involve the period of time during which a particular grade of material is produced for sale. A production run could also be a period of time during which changes to the process are validated.

Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas

Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas is field work carried out as part of business operations in the oil & gas and mining industries.

Prototype

A prototype is an original model on which something new is patterned and of which all things of the same type are representations or copies. It is a basic experimental model that possesses the essential characteristics of the intended product. A prototype is normally understood to be a trial model or preliminary version. It is developed to test the feasibility of a concept or hypothesis within a systematic investigation or search and generally has no lasting value.

For more information, please refer to the SR&ED while Developing an Asset Policy.

Proxy method

The proxy method is an alternative method to the traditional method in computing SR&ED expenditures. Specifically, the proxy method involves calculating a notional amount for SR&ED overhead and other expenditures called the prescribed proxy amount (PPA).

For more information, please refer to the Traditional and Proxy Methods Policy.

Psychological research

Psychological research is research into the functions of the mind and the behaviour of humans or animals in relation to their environment.

The definition of SR&ED specifically excludes work with respect to research in the social sciences or the humanities. Psychology is a social science; however, paragraph (d) of the definition of SR&ED lists psychological research work as eligible work when it is undertaken directly in support of an SR&ED project in a field of science or technology other than the social sciences or humanities. Only the work with respect to psychological research that is commensurate with the needs and directly in support of an SR&ED project can be claimed.

For example, in many projects involving interaction between human and machine, the interaction between a human operator and the device that he or she is controlling poses a complex technological problem. Major contributing factors are the physiological, neurological, and other limitations of the human operator, considered as an element within a servo system. The effect of these limitations implies that changes to the purely physical elements comprised in the system may be necessary, and that these changes can be best undertaken by simulation or actual (or real) testing with the human operator in the servo loop. Adjustments or modifications to the system are made until a point is reached where the human operator can carry out a prescribed task without excessive physical or neurological effort. Certain aspects of psychological research may also be involved in this kind of development. Work with respect to this type of psychological research that is directly in support and commensurate with the needs of basic research, applied research or experimental development is considered eligible.

Public authority

A public authority is generally an entity that:

• has a duty to the public;
• is subject to a significant degree of government control; and
• uses its profits for the benefit of the public.

Q

Qualified individuals

Qualified individuals are personnel who have qualifications and / or experience in science, technology or engineering. The qualifications and experience must be relevant to the science or technology involved in the projects claimed.

Qualified SR&ED expenditures

The term qualified SR&ED expenditure is a term used on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The term represents all the amounts that qualify for calculating the investment tax credit in a tax year, except for repayments of assistance and contract payments made in that year.

For more information, please refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Qualifying corporation

Qualifying corporation means:

• a corporation that is a Canadian-controlled private corporation (CCPC) in a particular tax year, with a taxable income in the previous tax year that is not more than the corporation's qualifying income limit for the particular tax year, or
• a corporation that is a CCPC in a particular tax year and is associated with one or more corporations and the total of the taxable incomes of the corporation and the associated corporations for their last tax year ending in the preceding calendar year that is not more than the corporation's qualifying income limit for the particular tax year.

The taxable income in the previous tax year or in the last tax year ending in the preceding calendar year is calculated before taking into consideration the specified future tax consequences for that previous year.

Where a CCPC's qualifying income limit is reduced to zero because the CCPC's taxable capital is $50 million or greater in the immediately preceding year, the CCPC is not a qualifying corporation and would not be entitled to any refundable ITC.

Qualifying income limit

For the 2010 and later tax years, the qualifying income limit of a corporation for a particular tax year is the amount determined in the ITA by the formula:

$500,000 x [($40,000,000 – A) / $40,000,000]

In this formula A is:

• nil if the taxable capital amount* is less than or equal to $10 million; or
• is the lesser of $40 million and the amount by which the taxable capital amount exceeds $10 million, in any other case.

* The taxable capital amount is the total of the corporation's taxable capital employed in Canada for its immediately preceding tax year and the taxable capital employed in Canada of all associated corporations (if applicable) for the last tax year ending in the preceding calendar year that ended before the end of the particular tax year of the corporation. Taxable capital employed in Canada by the corporation has the meaning provided in the ITA. For more information on taxable capital, please refer to Interpretation Bulletin IT 532, Part I.3 – Tax on Large Corporations.

For more information, please refer to the SR&ED Investment Tax Credit Policy.

Quality control

Quality control is the techniques and work that sustain the quality of a product or service to satisfy given requirements.

Quality control consists of data collection, data analysis, and implementation, and applies to all phases of the product life cycle: manufacturing, delivery and installation, and operation and maintenance.

Quality control is usually concerned with the functional merits of a material, device, product (for example, conformity to design specifications, including defining testing procedures and minimum quality standards), or process (for example, determining what changes must be made to achieve or maintain the required level of quality).

Work with respect to quality control is specifically excluded from the definition of SR&ED .

R

Related benefits

Related benefits include the employer’s share of payments to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP), Employment Insurance (EI), the Worker’s Compensation Board (WCB), or the Commission de la santé et de la sécurité du travail du Québec (CSST), an approved employee pension plan, or employee medical, dental, or optical insurance plans, and premiums to a superannuation plan.

For more information, please refer to section 5.1 of the SR&ED Salary or Wages Policy.

Related to a business of the claimant

The words related to the business should be interpreted broadly. For SR&ED to be related to a business carried on by a claimant, it is necessary to have some interconnection or link between the SR&ED work and the general area of the claimant's business. For greater certainty, SR&ED related to a business includes any SR&ED that may lead to, or facilitate, an extension of that business.

The prosecution of SR&ED, in and of itself is only considered a business of the claimant to which SR&ED relates if the claimant derives all or substantially all (ASA) of its revenue from the prosecution of SR&ED.

Where a claimant is a corporation, and the SR&ED performed by the claimant relates to a business actively carried on by a related (non-arm’s length) corporation at the time when the SR&ED was performed, the related to the business requirement is satisfied for the claimant.

Remuneration based on profits

Remuneration based on profit means any remuneration to an employee that is conditional on the profit of the business or that is a portion of the profit of the business.

Retiring allowance

A retiring allowance is an amount paid on or after the retirement of an employee in recognition of long service or in respect of the loss of an office or employment. A retiring allowance is not considered to be salary or wages by definition. As a result, a retiring allowance cannot be allowed as salary or wages under either the traditional method or the proxy method. A claimant may be able to treat a retiring allowance as overhead and other expenditures under the traditional method if it is directly related to the prosecution of SR&ED and is incremental.

For more information, please refer to section 4.4 of the SR&ED Overhead and Other Expenditures Policy.

S

Salary base

The salary base is an amount used to calculate the prescribed proxy amount (PPA). The PPA for a tax year is a percentage of the salary base, subject to the overall PPA cap.

The salary base is composed of the salaries or wages (incurred and paid in the tax year or paid within 180 days of the tax year-end) of employees who are directly engaged in SR&ED and that are included in the pool of deductible SR&ED expenditures. However, the salary base cannot include taxable benefits, remuneration based on profits, or bonuses, or prior years unpaid salary or wages paid in the tax year. In addition, the amount of salary or wages that can be taken into account is further restricted for a specified employee.

For more information, please refer to the Prescribed Proxy Amount Policy.

Salary or wages

The term salary or wages is defined in the ITA and means income from an office or employment. Salary or wages generally includes any expenditure made in respect of a taxable benefit as well as vacation pay, statutory holiday pay, sick leave pay, pay in lieu of termination notice, bonuses, tips and gratuities, honorariums, director's fees, management fees and commissions.

Salary or wages do not include amounts in respect of the employer’s shares of the related benefits, amounts for extended vacation or sick leave, stock options benefits and retiring allowance.

These amounts must be incurred and paid in the tax year or paid within 180 days of the tax year-end.

For more information, please refer to the SR&ED Salary or Wages Policy.

Sales promotion

Sales promotion is work that supplements advertising and personal selling; coordinating them, and making them effective.

Sales promotion work generally includes stimulating sales through options such as:

• special offers;
• demonstrations;
• contests;
• samples;
• discounts;
• exhibitions or trade shows;
• games;
• giveaways;
• public relations; and
• point-of-sale displays and merchandising.

Work with respect to sales promotion is specifically excluded from the definition of SR&ED .

Science

Science is a branch of study in which phenomena are observed and classified and, usually, in which quantitative and qualitative relations are formulated and verified.

Scientific knowledge

Scientific knowledge is the understanding of science.

For more information, please refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Scientific or technological advancement

The expression “scientific or technological advancement” refers to either scientific advancement or technological advancement, or both.

Scientific or technological knowledge

The expression “scientific or technological knowledge” refers to either scientific knowledge or technological knowledge, or both.

Scientific or technological knowledge base

Scientific or technological knowledge base consists of the combined knowledge of the resources within the business and those sources that are reasonably available publicly.

The resources within the business include both:

• its personnel's scientific or technological knowledge, education, training, and experience;
• its technical capabilities represented by its current products, techniques, practices, and methodologies (for example, trade secrets and intellectual property).

Publicly available sources could include:

• scientific papers;
• journals;
• textbooks;
• internet-based information sources;
• expertise accessible to the business (for example, through suppliers, recruiting employees or hiring consultants or contractors).

The scientific or technological knowledge base may vary from business to business because:

• their internal resources are different;
• some of the public sources of knowledge may not be reasonably available to all businesses.

Scientific or technological uncertainty

The expression “scientific or technological uncertainty” refers to either scientific uncertainty or technological uncertainty, or both.

Scientific uncertainty

Scientific uncertainty means whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of scientific knowledge.

For more information, please refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Scientific research and experimental development (SR&ED)

SR&ED is defined for income tax purposes in subsection 248(1) of the ITA as follows:

“‘scientific research and experimental development’ means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

(c) experimental development, namely, 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,

and, in applying this definition in respect of a taxpayer, includes

(d) 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 work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,

but does not include work with respect to

(e) market research or sales promotion,

(f) quality control or routine testing of materials, devices, products or processes,

(g) research in the social sciences or the humanities,

(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

(j) style changes, or

(k) routine data collection;”

Second term shared-use-equipment

To qualify as second term shared-use-equipment, a property must be:

• property that was first term shared-use-equipment;
• equipment that is used by the claimant during its operating time in the period starting at the time the property was acquired and was available for use and ends at the end of the first tax year that was at least 24 months after the time the equipment was acquired and available for use (this is the second period); and
• used by the claimant during its operating time in the second period primarily for the prosecution of SR&ED in Canada.

For more information, please refer to the SR&ED Shared-Use-Equipment Policy.

Shared-use-equipment (SUE)

Investment tax credits (ITC) are no longer available in respect to SUE for tax years ending after February 1, 2017. Expenditures of a capital nature for capital property acquired or available for use after 2013, no longer qualify for SR&ED tax incentives. However, because of the interaction of the definition first term SUE and second term SUE , ITCs on SUE may still be claimed until 2017.

A SR&ED ITC can be earned on a portion of the cost of equipment used primarily for the prosecution of SR&ED. Equipment that qualified as first term shared-use-equipment or second term shared-use equipment can earn an SR&ED ITC.

For more information, please refer to the SR&ED Shared-Use-Equipment Policy.

Social sciences

Social sciences are disciplines characterized by their concern with human beings, their culture, and their economic, political, and social relationships with the environment.

Generally, the social sciences include anthropology, economics, political science, psychology, sociology, and sometimes education, law, philosophy, religion, and history. Management is also considered a social science.

Work with respect to research in social sciences is specifically excluded from the definition of SR&ED. However, under certain circumstances, work with respect to psychological research may be eligible.

Note
The following are the explanation of changes to this definition as of April, 2015.

1. “criminology”, “geography”, and “psychiatry” were removed from the definition.
2. “and sometimes” was added to indicate that education, law, philosophy, religion, and history are not always considered social sciences.

The following are the explanation of changes to this definition as of April 2017.

1. The definition has been simplified to improve understanding and clarity

Specified employee

A specified employee is an employee who does not deal at arm's length with the employer or who is a specified shareholder of the employer. A specified shareholder is a person who owns, directly or indirectly, at any time during the year, 10% or more of the issued shares of any class of the capital stock of the employer or of any corporation related to the employer. A specified employee could also be someone related to a specified shareholder; e.g. a sister, a brother, a spouse, etc.

For more information, please refer to the SR&ED Salary or Wages Policy.

SR&ED contract

A SR&ED contract is a contract for basic research, applied research or experimental development, or support work performed on behalf of a claimant.

For more information please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

SR&ED capital expenditure

SR&ED capital expenditures made after 2013, no longer qualify for SR&ED tax incentives. This includes capital expenditures made before 2014 for property that became available for use after 2013.

A SR&ED capital expenditure is an expenditure made to acquire new or used depreciable property intended to be:

• used all or substantially all (ASA) of the operating time in its expected useful life in the performance of SR&ED in Canada; or
• consumed ASA of its value in the performance of SR&ED in Canada.

For more information please refer to the SR&ED Capital Expenditures Policy.

SR&ED current expenditure

A SR&ED current expenditure is an expenditure of a current nature made by a claimant on or in respect of SR&ED that is described in the following policies:

• SR&ED Salary or Wages Policy;
• Materials for SR&ED Policy;
• Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy;
• SR&ED Lease Expenditures Policy; [before 2014]
• SR&ED Overhead and Other Expenditures Policy;
• Third-Party Payments Policy.

SR&ED reporting deadline

A claimant’s reporting deadline for an SR&ED expenditure is the last day for which a prescribed form containing prescribed information in respect of the expenditure is required to be filed for the year. The reporting deadline to file the prescribed Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, for an SR&ED expenditure is 12 months after the claimant’s filing-due date of the return for the year in which the expenditure was incurred.

The reporting deadline to include an ITC amount earned in respect of an SR&ED expenditure on the prescribed Schedule T2SCH31, Investment Tax Credit – Corporations or Form T2038(IND), Investment Tax Credit (Individuals), is also 12 months after the claimant’s filing-due date of an income tax return for the year in which the expenditure was incurred.

For corporations the SR&ED reporting deadline is generally 18 months after the tax year end.

For more information, please refer to section 6.0 of the SR&ED Filing Requirements Policy.

Style change

A style change is a change in the physical appearance or arrangement of an article without altering its utility, efficiency, function, or operating characteristics.

Work with respect to style changes is specifically excluded from the definition of SR&ED .

Support work

The work identified in paragraph (d) of the definition of SR&ED is usually referred to as support work. Work with respect to the eight categories listed in paragraph (d) does not constitute SR&ED on its own. However, if it is commensurate with the needs and directly in support of basic research, applied research or experimental development work undertaken in Canada, it falls within the meaning of SR&ED.

System uncertainty

System uncertainty is a form of technological uncertainty that can arise from or during the integration of technologies, the components of which are generally well known. This is due to unpredictable interactions between the individual components or sub-systems.

Systematic investigation or search

The systematic investigation or search called for in the definition of SR&ED is an approach that includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results.

For more information, please refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Note
The following is the explanation of changes to this term as of April 24, 2015.

1. “scientific method” has been removed from the explanation as it is no longer used in policy.

T

Taxable benefits

Taxable benefits are benefits or allowances an employer provides to its employees that are taxable under the ITA. For example: automobile benefits; housing, board, and meals; gifts and awards; interest-free or low-interest loans; group term life insurance policies; or tuition fees.

For more information, please refer to section 3.0 of the SR&ED Salary or Wages Policy.

Taxable supplier

A taxable supplier means:

• a person resident in Canada;
• a Canadian partnership; or
• a non-resident person or non-Canadian partnership that carries on a business through a permanent establishment in Canada.

For more information, please refer to section 9.0 of the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Technological advancement

Technological advancement is the generation or discovery of knowledge that advances the understanding of technology.

For more information, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Technological knowledge

Technological knowledge is the understanding of technology.

For more information, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Technological uncertainty

Technological uncertainty means whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of technological knowledge.

For more information, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Technology

Technology is the practical application of scientific knowledge and principles.

While technology can be represented in physical form (patents, procedures, design documents, manuals, etc.), it is not a physical entity. It is the knowledge of how scientifically determined facts and principles are embodied in the material, device, product, or process.

Testing / routine testing

Testing is the application of procedures designed to observe, measure, or verify attributes, properties, or performance. The term routine testing refers to testing performed during the course of normal business operations, for example, testing carried out primarily to determine user acceptance, suitability, marketability, or competitive assessment. Work with respect to routine testing is specifically excluded from the definition of SR&ED . Only the testing work that is commensurate with the needs and directly in support of basic research, applied research or experimental development is eligible.

Third-party payment

A third party payment is generally a payment made by a claimant to an entity to be used for SR&ED carried on in Canada, that is related to a business of the claimant and the claimant must be entitled to exploit the results of the SR&ED.

For more information, please refer to the Third-Party Payments Policy.

Traditional method

The traditional method involves specifically identifying and claiming all overhead and other expenditures, directly attributable to the SR&ED carried on in Canada, that the claimant incurred during the year.

For more information, please refer to the Traditional and Proxy Methods Policy.

V

Virtually valueless

Virtually valueless means a value that is 10% or less of the cost.

Y

Year’s maximum pensionable earnings (YMPE)

The year's maximum pensionable earnings (YMPE) is an amount determined under section 18 of the Canada Pension Plan. It is used in the calculation of the maximum amount of salary or wages for a specified employee that can be included in the pool of deductible SR&ED expenditures (5 times the YMPE) and in the salary base for the calculation of the prescribed proxy amount (PPA) (2.5 times the YMPE). To obtain the YMPE for each year, use the Rates for Money Purchase limits, RRSP limits, YMPE, DPSP limits and Defined Benefits limits.