Shop floor SR&ED is a class of work which can qualify for SRED credits. The CRA recognizes shop floor SR&ED as a valid use case. It is referenced in the following excellent reference document on canada.ca, see Section 4.0, SR&ED in a production or manufacturing environment.
SRED does not occur exclusively in labs or research facilities. SRED can be performed in a customer’s production facilities and on regular manufacturing lines to experiment on ways to overcome a technological obstacle. By the same token, valid SRED work is not the preserve only of scientists, engineers and dedicated R&D staff. Valid SRED can be carried out by your regular staff. This type of work that occurs at a customer’s regular facilities, often by non dedicated R&D personnel, is known generically as shop floor SR&ED.
Properly breaking out SR&ED expenses from regular non-qualifying production costs can be challenging. One of the key principles for sizing shop floor SRED is that the work claimed must be commensurate with activities required to carry out the experimentation. So if you are experimenting on a process that involves a batch size, only the expenses associated with the smallest viable batch size from a production feasibility standpoint can be claimed as SRED expenses. When SRED is carried out in a production facility, the proportion of the production run attributable to SRED must be determined. This is a complicated area of SRED. The topic is covered in some detail in a policy paper on canada.ca called SR&ED During Production Runs Policy
Production runs involving SRED must be characterized as either Experimental Production, or as Commercial Production. The differentiator between the two types of production is the technical risk associated with adverse effects of the SRED experimentation. If these adverse effects are material, and they are directly related to the experiments being carried out, then the production run is considered Experimental Production. If these requirements are not met, then the production run is considered to be Commercial Production. The extent of the costs which can be allocated as SRED expenses are much more limited when the SRED is being performed as part of one or more Commercial Production runs.
Another topic that comes up with shop floor SRED are prototypes. Some prototyping is straightforward when it’s clear that the sole purpose of developing the prototype is for experimental purposes. Allocating salary, material and subcontract expenses properly to prototyping activity is clear cut. Some prototyping activity is considered to be for the development of custom products. Analagous to commercial production discussed above, SRED may occur when we develop custom products, but the extent of the allowable SRED expenses is more limited. The treatment of prototypes and custom products for SRED purposes are discussed in a policy paper on canada.ca called SR&ED while Developing an Asset Policy
Check out g6’s SRED calculator here.