SR&ED Restrictions – When does Testing & Quality Control Qualify for a Claim?

When claiming SR&ED it’s important to note that the Income Tax Act (“ITA”) specifies the following exclusions:

1. market research or sales promotion,
2. quality control or routine testing of materials, devices, products or processes,
3. research in the social sciences or the humanities,
4. prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,
5. the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,
6. style changes, or
7. routine data collection;

While some of these seem obvious, number 2, quality control or routine testing is not. The definition begs the questions – what is quality control? What is routine?

Although these terms are not defined within the ITA, the CRA considers quality control to be work that sustains the quality of a product or service to satisfy given requirements. This includes data collection, analysis, and implementation.

Routine testing is the application of procedures designed to observe, measure, or verify attributes during normal business operations primarily carried out to determine user acceptance, suitability, marketability or competitive assessment.

However, these definitions are not contentious. The point of contention is where does routine testing or quality control end and experimental testing and analysis begin.

For a SR&ED claim, only the testing and analysis work that is commensurate with the needs and directly in support of basic research, applied research or experimental development would be considered eligible.

For example, if your team was developing a mobile application, the testing and quality control of a new version would not be eligible; however, if there was testing of a new component that met the criteria for experimental development then that allocated testing time would be eligible.

In the event of a CRA audit, it will be important to be able to substantiate the claimed time and clearly delineate the time spend on quality control between the routine testing and testing for, or in direct support of, the SR&ED work.
We have two recommendations to ensure that the time claimed will be defendable in the audit:

1. Clearly define the amount, extent or duration of the experimental work necessary for and directly in support of the SR&ED work.
2. Track employee time and the activities using time sheets and activity notes so as to allow for calculation of the percentage of time spent on the above, separate from routine testing and quality control. We recommend using a digital time tracking tool to ensure the data is preserved as compared to a pen and paper record system that could be lost or misplaced.