Is your routine production actually experimental?
Canada's Scientific Research and Experimental Development (SR&ED) tax credit system is renowned as one of the most generous in the world. Is your business taking advantage of this opportunity? Many businesses operate under the misconception that SR&ED is solely for groundbreaking laboratory discoveries. In reality, a significant portion of "routine" production activities can be qualified as experimental production, unlocking substantial tax credits. Discover how small incremental changes to your manufacturing or exploration processes can drive innovation and translate into financial gains.
Understanding experimental production
Experimental production is a subset of the SR&ED program. Dmitri Chvedov, Managing Director, Credits & Incentives at BDO Canada, has specialized experience helping businesses with their experimental production claims. He explains that experimental production allows businesses to claim credits for implementing research work in a commercial environment. This means that when businesses experiment with changes directly on their production lines—such as, altering processes, materials, creating new products or modifying existing ones—they can potentially claim the cost of the entire continuous process, significantly increasing the size of their SR&ED claims.
Key criteria to qualify for experimental production
To qualify for SR&ED credits, businesses must satisfy three main criteria: uncertainty, advancement, and systemic investigation. To claim experimental production, businesses must additionally demonstrate either:
The potential for changes to disrupt production. For example, testing new technology or a modified process often means slowing down the production line, which can lower throughput.
The potential for changes to affect the quality of the product, this could be a downgraded product or more rejects than in normal production.
Dmitri emphasizes that even if the experimental changes do not result in quality issues or process slowdowns, the potential for such risks, as substantiated by experience of the competent professionals, is sufficient to make a claim. It is crucial to clearly explain this potential to the Canada Revenue Agency (CRA).
Demonstrating potential risks
When making a claim for experimental production, it's important to demonstrate how changes in production can cause potential risks to the product or the process. Success does not eliminate the possibility of claiming experimental production. Rather, the focus should be on demonstrating the inherent uncertainties and potential adverse outcomes.
Your claim should clearly define a particular period of time or production volume and why this was selected for the experimental production claim. It's important to document the changes, observations made during experimentation, and analysis of the observed effects.
To support the claim, businesses should proactively explain the basis for potential risks. This can be done by drawing on personal expertise, highlighting technical challenges, and explaining how the experimental activities differ from conventional commercial operations. As Dmitri states, "The core principle of SR&ED is to demonstrate activities that differ from routine engineering or standard day-to-day practices. This distinction is especially crucial when substantiating experimental production claims."
By effectively demonstrating the potential risks and the non-routine nature of the work, businesses can unlock significant tax benefits.
A real-world example
Experimental production claims have been successfully made across various industries and activities. For instance, a company that purchased a robotic arm to enhance its manufacturing process found that the arm's initial performance was satisfactory but not optimal. The company spent significant time and resources making incremental improvements to the robotic arm's functionality. By documenting these efforts and demonstrating the potential risks and uncertainties involved, the company was able to claim SR&ED credits for the entire process. This example highlights how even routine activities aimed at improving existing equipment can qualify for substantial tax credits under experimental production.
BDO's role in maximizing experimental production claims
Many businesses perform activities that qualify as experimental production but fail to recognize their eligibility. Companies often view these activities as routine commercial operations and are hesitant to claim due to fear of CRA audits. However, with proper guidance, businesses can overcome these challenges and leverage tax credits to fuel their innovation and optimization efforts.
BDO helps businesses navigate the complexities of claiming experimental production activities. With a team of experienced professionals, BDO assists in identifying eligible activities, preparing comprehensive documentation, and defending claims. Notably, BDO often offers a success-based fee structure, significantly reducing the risk of incurring professional fees for an unsuccessful claim. This presents a very low-risk alternative with the potential for sizeable financial benefits.
Contact us for an experimental production tax credit assessment
Dmitri Chvedov
Managing Director, Credits & Incentives
[email protected]
The information in this publication is current as of March 20, 2025.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.