Navigating SR&ED Eligibility in a Typical Engineering Project: A Practical Overview 

Engineering projects can be complex, often progressing from a high-level concept to detailed design and finally to construction and commissioning.  

Within each phase, opportunities may arise to undertake activities that qualify for Canada’s Scientific Research & Experimental Development (SR&ED) tax incentive program.  

However, separating eligible work from ineligible tasks can be challenging, particularly when engineering managers are juggling feasibility studies, design refinement, and real-world implementation.  

Below is an overview of how SR&ED eligibility might map onto a typical engineering project framework, along with examples to help distinguish the grey areas. 

 

Phase 1: Preliminary Engineering 

What Typically Happens 

• Defining project feasibility, scope, and high-level objectives 
• Conducting initial research and conceptual design 
• Performing feasibility studies (technical, financial, or operational) 
• Identifying technological uncertainties and potential routes to address them 

SR&ED Considerations 

• Identifying Technological Uncertainties: If the project’s objective involves pushing beyond established engineering solutions, like testing novel materials in a water treatment pilot plant, this preliminary work could be SR&ED-eligible. For instance, if an engineering team is unsure whether a specialized filtration membrane can tolerate certain chemical concentrations, investigating that uncertainty through lab or pilot studies may qualify. 
• Experimental Design and Hypothesis Building: Formulating hypotheses on how to overcome known knowledge gaps can be seen as SR&ED if supported by a systematic plan that involves testing and analysis. 

What’s Often Not Eligible 

• Routine Due Diligence: Standard cost estimates, market viability checks, or financial modeling that does not directly tackle a technological challenge typically fall outside SR&ED. A feasibility study driven solely by economic or regulatory considerations usually won’t qualify unless it delves into genuine scientific or technological unknowns. 

Phase 2: Detailed Engineering 

What Typically Happens 

• Refining conceptual designs into workable solutions 
• Producing detailed drawings, simulations, and technical calculations 
• Choosing materials and processes, potentially running pilot tests 
• Iterating on prototypes based on test results 

SR&ED Considerations 

• Prototyping and Iterative Testing: When testing a new approach—for example, designing advanced aeration mechanisms in a water treatment facility—the iterative cycle of designing, building, and testing is a strong indicator of SR&ED if it’s aimed at overcoming technological uncertainties. 
• Data Analysis and Refinement: If each test iteration informs further design changes, and those changes address questions that can’t be answered by existing knowledge, you likely have SR&ED. 

What’s Often Not Eligible 

• Routine Engineering Tasks: Once the fundamental uncertainty is resolved, day-to-day engineering tasks, such as drafting final schematics or standard structural calculations, typically don’t count. 
• Administrative and Managerial Activities: Tracking budgets, scheduling, or project management duties are crucial but generally ineligible for SR&ED. 

Phase 3: Construction, Fabrication, and Commissioning 

What Typically Happens 

• Building or assembling the system 
• Installing equipment and integrating subsystems 
• Testing and commissioning to ensure full operational readiness 

SR&ED Considerations 

• Ongoing Experimental Work: If, during commissioning, unforeseen performance issues arise—for example, unexpected fouling in the pilot plant’s filtration system—and the team must perform further testing and modifications to resolve the underlying cause, that additional experimental development could qualify. 
• Validation Under Real-World Conditions: When genuine uncertainties persist into the commissioning phase, such as scaling up from a lab prototype to a full-scale facility, additional trials to confirm that new technology meets its performance targets may be SR&ED. 

What’s Often Not Eligible 

• Standard Construction/Assembly: Routine building tasks, following known engineering practices, typically do not involve scientific or technological advancement. 
• Post-Commissioning Documentation and Maintenance: Final reports, operator training, or maintenance protocols aren’t experimental if the uncertainties have already been addressed. 

Ambiguous Activities: A Feasibility Study Example 

Consider a feasibility study in the context of designing a novel water treatment facility. If the study only covers financial returns, market positioning, or regulatory compliance, it doesn’t meet SR&ED requirements.  

On the other hand, if that same study is focused on whether a particular high-capacity membrane can handle a higher level of contaminants, something unproven and unknown to the engineering community, this could involve systematic investigation and testing, thus aligning with SR&ED. 

The key differentiator is whether you are truly tackling a technological unknown or simply conducting routine project planning. 

Summary 

Understanding how SR&ED applies within each project phase can unlock valuable tax incentives and fund further innovation. While preliminary engineering might unearth your project’s big questions, detailed design usually holds the most substantial experimental development work.  

Even in construction and commissioning, new hurdles may arise that warrant additional experimentation and potentially qualify for SR&ED. The key for SR&ED eligibility is whether the activity is directly involved in addressing technological uncertainties or advancing scientific knowledge.  

By clearly documenting how activities are connected to overcoming technological challenges, and separating those from routine or administrative tasks, you stand a better chance of success when filing an SR&ED claim. 

In a climate where engineering solutions must constantly evolve, be it more efficient treatment methods in water facilities or more robust materials for aerospace, SR&ED incentives can provide the boost needed to explore uncharted territory. This documentation might include experimental logs, design iterations, test results, and evidence of technological risk mitigation. Being proactive in identifying and documenting eligible activities at each project stage is essential to tapping into these benefits.