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What is the difference between experimental and commercial production?

The CRA has prepared Application Policy 2002-02R2: Experimental Production and Commercial Production with Experimental Development Work - Allowable SR&ED Expenditures to clarify this issue:

"The purpose of this revision is to clarify the methodology that claimants should use to distinguish between experimental production (EP) and experimental development (ED) work that occurs in conjunction or simultaneously with commercial production (CP+ED). EP and the ED part of CP+ED are eligible. The purpose of distinguishing between EP and CP+ED is to isolate the ineligible CP."

"For the purposes of this paper, experimental production is defined as follows:

  • EP means the output of experimental development that is required to verify whether the technological objectives have been met and/or if a technological advance is achievable.
  • The purpose of the trial is to evaluate the technical aspect of the project. This is determined on the basis of the technical considerations and evidence relating to the particular trial. Accordingly, the resulting sale of the EP is normally only incidental or secondary to the carrying out of ED work."

"EP may be necessary, for example, to document and/or demonstrate that technological advancements are achievable in a commercial setting and to further resolve technological uncertainties, and evaluate the SR&ED project."

"It is important to note that the sale of any production, whether it results in a profit or a loss, should not be used to determine whether the context of the ED is EP or CP+ED. Rather, a product sale should trigger further investigation identifying other technical considerations and evidence (supporting facts) that can be used to determine the context of the work."

The following costs for required experimental production may be claimed:

  • Labour: The portion of labour costs for an employee directly undertaking, supervising or supporting (traditional method), or for an employee directly engaged in (proxy method), the ED work that results in the required EP, is an allowable SR&ED expenditure.
  • Materials: The cost of materials consumed or transformed in producing the required EP is a deductible SR&ED expenditure under both the proxy and the traditional methods.