Chemicals Guidance Document 2 - Qualifying Work

1. Introduction

1.1. This guidance document is intended to be used to aid in determining those aspects of chemical-related research and development that meet the definition of Scientific Research & Experimental Development (SR&ED) under subsection 248(1) of the Income Tax Act, which defines SR&ED as:

"Systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,

and, in applying this definition in respect of a taxpayer, includes

(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b) or (c) that is undertaken in Canada by or on behalf of the taxpayer,

but does not include work with respect to

(e) market research or sales promotion,

(f) quality control or routine testing of materials, devices, products or processes,

(g) research in the social sciences or the humanities,

(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

(j) style changes, or

(k) routine data collection.

1.2. The three criteria for characterizing eligibility -- scientific or technological advancement, scientific or technological uncertainty, and scientific and technical content -- are discussed in Sector Specific Guidelines I (Chemicals Guidance Document - Shop Floor SR&ED [Reference 1]). It is important that these criteria be understood completely by the claimant prior to submission of the claim. The purpose of this guidance document is to supplement the documents: i) Information Circular 86-4R3 [Reference 3], ii) "Chemicals Guidance Document 1 - Shop Floor SR&ED" [Reference 1], and iii) "Recognizing Experimental Development" [Reference 9], to clarify what work meets the definition of SR&ED, and provide specific examples to assist the "Chemicals SR&ED Performers" in the interpretation and practical application of the SR&ED program. "Chemicals Guidance Document 2- Qualifying Work" is intended to assist technical managers and staff in identifying qualifying SR&ED work. It will be updated periodically as required to reflect changing technology and other issues that arise. The latest version of this document is posted on the CRA's SR&ED Web site at:
Chemicals Guidance Document 2 - Qualifying Work.

1.3. This guidance document deals with both the technical aspects of the SR&ED claim and with relevant expenditure-related issues. For a complete description of expenditure-related issues, the reader is referred to Interpretation Bulletin IT-151R5 (Consolidated) [Reference 2], Scientific Research and Experimental Development Expenditures. It is important to note that, even if a project meets the definition of SR&ED, it does not imply that all the expenditures are allowable; this is discussed further in Interpretation Bulletin IT-151R5 (Consolidated).

1.4. All of the experimental and analytical work associated with the search to resolve the technological problems in the chemical sector are part of the "envelope of SR&ED" (see Glossary), when undertaking basic research, applied research, or experimental development [Reference 3]. The "envelope" also allows direct support work concerning engineering or design, operations research, mathematical analysis or computer programming, data collection, testing, or psychological research.

1.5. Examples have been presented in Section 4 of this guidance document to illustrate how to self-assess an SR&ED claim for actual chemical industry-type projects at different stages of development. The examples are illustrative of the types of projects claimed in this industry, but are not intended to be exhaustive. The examples have been designed to focus around the following principal stages in the normal cycle of experimental development for many chemical companies:

• Definition of Concept/Technological Challenge (Example 4.1)
• Systematic Program to Achieve Technological Objective (Examples 4.2, 4.3, 4.4; lab-scale, bench-scale, and technical-scale reactors respectively)
• Development of Prototype or Pilot (Example 4.5)
• Scale Up to Commercial Production Stage for a New Technology (Example 4.6)
• Experimental Production or Utilization using New Technology on Existing Equipment (Example 4.7)
• Experimental Production or Utilization using New Technology on Existing Off-site (Customer's) Equipment (Example 4.8)
• Post Production Improvement (Example 4.9)

The technical description that is included for each example is to provide a framework that allows the reader to initiate self-assessment. During the self-assessment phase, potential work and expenditures are identified, and shown in a tabular format at the end of the example. A more detailed discussion on how to prepare a technical project description can be found in Chemicals Guidance Document 1: Shop Floor SR&ED.

1.6. Examples 4.1 through 4.5 illustrate the progressive development of a new catalyst technology from the conceptual stage (Example 4.1), through to various experimental stages, including: lab-scale (Example 4.2), bench-scale (Example 4.3), technical-scale (Example 4.4), and pilot-scale (Example 4.5). For Examples 4.1 through 4.5, a batch mode of operation is assumed.

1.7. In comparison, with Examples 4.1- 4.5 (for a batch mode of operation), Examples 4.6 through 4.9 illustrate continuous chemical processes. Example 4.6 illustrates the "non-routine" scale-up to commercial scale of the `new catalyst technology' (described in Examples 4.1- 4.5). Example 4.7 illustrates experimental development using the "new catalyst technology" on the shop floor. Example 4.8 focuses on several key concepts involved in the toll manufacturing process (see also Subsection 2.5.2). In Example 4.9, a completely different type of process technology (water treatment plant) is presented, and it illustrates the concept of "post-production improvement" to an existing gas-phase polyethylene plant.