Definitions

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Research and development

Research and development (R&D) is systematic investigation carried out in the natural and engineering sciences by means of experiment or analysis to achieve a scientific or commercial advance.

Research is original investigation undertaken on a systematic basis to gain new knowledge.

Development is the application of research findings or other scientific knowledge for the creation of new or significantly improved products or processes. If successful, development will usually result in devices or processes which represent an improvement in the “state of the art” and are likely to be patentable.

Example:

The investigation of electrical conduction in crystals was research. The application of this knowledge to the creation of a new amplifying device - the transistor - was development. The application of the device to the construction of new electrical circuits for television receivers was development. The formulation of new plastic cases for a television receiver is design, not development.

Research and development may be carried out either by a permanent R&D unit (e.g., R&D division) or by a unit generally engaged in any non-R&D activity such as engineering or production. In the first case, the R&D unit may spend part of its time on routine testing or trouble shooting or on some other activities which should not be included in R&D. In the second, only the R&D portion of such units’ total activity should be considered.

Research and development should be considered to be “Scientific Research and Experimental Development” as defined in Section 37, Regulation 2900 of the Income Tax Act; this section specifically excludes the following:

1. market research, sales promotion,
2. quality control or routine analysis and testing of materials, devices or products,
3. research in the social sciences or the humanities,
4. prospecting, exploring or drilling for or producing minerals, petroleum or natural gas,
5. the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,
6. style changes, or routine data collection,

Note:

Although the definition of “Scientific Research and Experimental Development” is considered to be the same as R&D, certain expenditures for scientific research cannot be claimed for income tax purposes (e.g., land, building). All expenditures attributable to R&D are included in this report.

Interpretation of R&D

Generally speaking, industrial R&D is intended to result in an invention which may subsequently become a technological innovation. An essential requirement is that the outcome of the work is uncertain, i.e., that the possibility of obtaining a given technical objective cannot be known in advance on the basis of current knowledge or experience. Hence much of the work done by scientists and engineers is not R&D, since they are primarily engaged in “routine” production, engineering, quality control or testing. Although they apply scientific or engineering principles their work is not directed towards the discovery of new knowledge or the development of new products and processes. However, work elements which are not considered R&D by themselves but which directly support R&D projects, should be included with R&D in these cases. Examples of such work elements are design and engineering, shop work, computer programming, and secretarial work.

If the primary objective is to make further technical improvements to the product or process, then the work comes within the definition of R&D. If however, the product, process or approach is substantially set and the primary objective is to develop markets, to do pre-production planning or to get a production or control system working smoothly, then the activity can no longer be considered as part of R&D even though it could be regarded as an important part of the total innovation process. Thus, the design, construction and testing of prototypes, models and pilot plants are part of R&D. But, when necessary modifications have been made and testing has been satisfactorily completed, the boundary of R&D has been reached. Hence, the costs of tooling (design and try-out), construction drawings and manufacturing blueprints, and production start-up are not included in development costs.

Pilot plants may be included in development only if the main purpose is to acquire experience and compile data.  As soon as they begin operating as normal production units, their costs can no longer be attributed to R&D.  Similarly, once the original prototype has been found satisfactory, the cost of other “prototypes” built to meet a special need or fill a very small order are not to be considered as part of R&D.