Distinguishing Between Routine and Qualifying Testing and Data Collection Activities
As indicated elsewhere in this newsletter, Revenue Canada has circulated a draft copy of their revised information circular (IC86-4R4) which elaborates on, and clarifies, a number of thorny issues respecting SR&ED claims. One of the thorniest has been the correct identification of testing and data gathering activities.
The testing issue was touched on briefly in our Fall 1997 issue of Strategies as it pertained to testing existing products to determine if they meet new regulatory requirements. Here we will attempt to contrast the issue of routine testing and routine data gathering, which are non-eligible activities, with those of testing or data gathering as support activities within an SR&ED project.
Distinguishing qualifying from routine testing
The draft revised IC states “Testing is a qualifying activity for an SR&ED project when commensurate with the needs, and directly in support of SR&ED. However, quality control, or routine testing of materials, devices, products or processes is an excluded activity.” It goes on to state “In the scientific method, a hypothesis is tested to attempt to (either) corroborate or reject it. Testing in this sense qualifies. Thus, testing of the scientific results or technological output, such as a new material, of an SR&ED project is eligible up to the point of the SR&ED project completion.” All other testing is not eligible.
Unfortunately, this description does little to help clarify the confusion. For example, if, in the process of routine development of a new product (Non-SR&ED work) the company performs routine testing of its component parts, such as motors or printed circuit boards, to ensure they meet their published specifications prior to using them, this activity is clearly not eligible. If however, the company has a qualifying SR&ED project and performs the same testing, this testing would be an eligible activity. It’s still routine work, but performed directly in support of the SR&ED project.
Not quite so clear is the following example. If the company performs testing of new materials as part of developing a new ink or paint formulation, does this qualify as eligible testing? The foregoing description would seem to indicate that it would, provided the company had formulated a hypothesis as to the correct ingredients, the component quantities, and their chemical and physical interactions in relation to desired product performance objectives such as drying time or viscosity. The same testing would (presumably) not qualify if performed in the course of simply attempting to test performance of a single ingredient prior to replacing a similar ingredient in an existing formulation. This approach implies the absence of a hypothesis and hence would be denied on that basis.
Another murky example can be found in agribusiness research. If a company decides to investigate various plant varieties by cloning particular ones with different characteristics, and testing them against desired objectives such as frost resistance, would this qualify as eligible or is this routine testing? It would appear this is routine, based on the above definition, because presumably the testing does not involve a hypothesis - or does it? Could it be argued the company put forth a hypothesis that certain characteristics in the plant variety were needed to achieve a specific frost resistance objective and that the testing was performed in support of this theory? To make the issue even murkier, could it be argued that the activities are simply routine data collection, or are they observation of a trial or experiment?
Distinguishing qualifying from routine data collection again the information circular states “data collection is a qualifying activity when commensurate with the needs, and directly in support of, SR&ED. However, routine data collection is excluded….”
The circular goes on to state “The analysis of large quantities of survey data can serve to search for scientific or technological advancement and to resolve scientific or technological uncertainty, even if the data were not specifically collected for the needs of the SR&ED project. In these cases, only activities associated with analysing the data would qualify, not the actual data collection”. It then carries on with four examples of routine data collection activities, including collecting baseline data to support routine development such as may be encountered in collecting physical property data; generally descriptive data and data collected from routine or standard repetitive procedures or processes, all of which are all ineligible.
The Strategy
Data collection and testing form a large part of many R&D projects. Indeed, observation and analysis of results of trials or experiments is considered to be a core SR&ED activity. In order to maximize your claim, make particular note in your documentation that the data being collected or the testing being performed is in direct support of your scientific or technological hypothesis. Be prepared to show why all the data collected or all the testing performed was necessary for your analysis to draw your scientific or technological conclusion.
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