An area of significant controversy as to whether an activity qualifies as SR&ED, is one where the activity involves meeting a regulatory requirement. Generally, testing to meet regulations only qualify when they are linked in as part of an SR&ED project. With limited exceptions, they do not of themselves meet the definition of SR&ED. Particularly they do not meet the technological advancement and uncertainty criteria that must be met before an activity would qualify as SR&ED. The Canada Revenue Agency (CRA) considered this issue in relation to testing activities undertaken to meet the requirements of the March 1993 New Substances Notification Regulations of CEPA. Their policy is that testing to meet these Regulations is eligible only where the testing is done to generate new knowledge by resolving scientific uncertainty in direct support of an SR&ED project. Further references to CRA policy on Regulatory Testing appear in parts 7.4 and 7.5 of Information Circular IC 86-4R3 (linked below) and in application policy number SR&ED 1996 - 02, dated January 16, 1996, Tests and studies required to meet in regulated industries (linked below).

The Strategy
Testing work, performed up to the point that there are still technological uncertainties to be resolved and where that testing is designed to resolve some or all of those uncertainties, is generally eligible. It is important therefore, during the course of an audit, to establish that testing to resolve technological uncertainties in relation to the new regulations, was performed.. If the taxpayer cannot establish this, the claim will be denied.

Links

• Tests and studies carried out to meet the requirements for products in regulated industries set out by industry standards associations such as the Canadian Standards Association (CSA) and the Underwriters’ Laboratories (UL)
• Reference to tests and studies to meet regulatory requirements or standards is made in Parts 7.4 and 7.5 of Information Circular IC 86-4R3
• Studies to meet the Canadian Environmental Protection Act (CEPA) and on clinical trials to meet regulatory requirements

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