SR&ED production runs: how to claim a trial on your live line

Key takeaway: SR&ED production runs fall into one of two buckets. If the run exists to test a change and puts the process or product at real technical risk, the CRA calls it ED+EP, and the costs of the output the test needed can count. If you are making product for sale and testing a change at the same time, it is ED+CP, and only the extra cost the test caused counts. ED+CP is the CRA's default. On the CRA's own example, a $200,000 run produced a $40,000 claim. Claim the whole run and you are claiming commercial production, which the law excludes.

SR&ED production runs are where shop-floor R&D gets claimed badly in both directions. Some manufacturers claim the whole run, scrap, labour and all. Others claim nothing because "we were making product anyway." Both are wrong more often than they are right.

The rules sit in one CRA document: the SR&ED During Production Runs Policy. This post walks through it in plain words. It covers how the CRA sorts a run, what each kind of run lets you claim, the CRA's own worked examples, and an illustrative trial on a machine shop line with the numbers shown.

Reviewed on 2026-10-20. The production runs policy is dated July 19, 2016, and we checked the live page against it on that date. Since the Budget 2025 changes became law on March 26, 2026, the CRA has shown a banner on its SR&ED policy pages, such as the Materials for SR&ED Policy, saying "SR&ED policies and forms are being reviewed and will be updated soon to align with the new legislation." The rules below are the ones in force today. Check the policy page again before you file.

What the CRA means by an SR&ED production run

A production run is a stretch of time when you run a process or line to hit a goal, and for SR&ED purposes the goal that matters is testing a change. The CRA's policy defines it in commercial terms: "a production run could involve the period of time during which a particular grade of material is produced for sale. A production run could also be a period of time during which changes to the process are validated."

The policy covers one situation: experimental development done while equipment or a process is running in a production setting. It says it applies "when experiments are carried out during production runs."

Two terms carry the whole policy.

Experimental production (EP). The CRA defines it as "the production output of experimental development (ED) that is required to verify whether the objectives of the SR&ED work have been met or if a technological advancement is achievable." In plain words: the parts, fabric or batch you had to make to find out if the change worked.

Excess production. "Any production beyond that required for the SR&ED is called 'excess production'." If you needed 200 parts to prove the change and ran 2,000, the other 1,800 are excess. Labour, overhead and materials on excess production are not allowable, per section 3.0.

A pilot plant is the easy case: "the production output from the operation of a pilot plant is experimental production," so a pilot plant run is always ED+EP.

The work has to be SR&ED before any of this applies

A production run only enters the SR&ED claim if the work done during it already qualifies as SR&ED. The policy is explicit: "the SR&ED must be clearly established before applying this methodology."

That means the usual test from the CRA's Guidelines on the Eligibility of Work. You were trying to achieve a technological advancement. It was uncertain whether you could, given what your team and the public knowledge base knew. And you worked through it with a systematic investigation by experiment or analysis. Our SR&ED for manufacturers hub covers that test for machine builders, electrical work and process changes.

The definition of SR&ED in the Income Tax Act then excludes, in paragraph (i), "the commercial production of a new or improved material, device or product or the commercial use of a new or improved process." That exclusion is the reason this policy exists. A trial on a live line sits right on the boundary between experimental development and commercial production.

The policy also closes one door early. It does not apply "when there is no experimental development during the production even if the production output will be used in SR&ED." Making a batch of standard material that you later test in the lab is not an SR&ED production run. The lab work may qualify. The batch does not become experimental just because it feeds an experiment.

ED+EP or ED+CP: the two kinds of SR&ED run

Every production run that is part of your SR&ED is one of two kinds. There is no third option, and the CRA decides it run by run.

ED+EP: experimental development with experimental production. The run exists to test the change. Its output is experimental production. "There is no simultaneous commercial work occurring," in the policy's words, and the costs of the needed output may be allowable.

ED+CP: experimental development in conjunction with commercial production. You are making product for customers and testing a change at the same time. The CRA describes the typical case: "changes are made to the process in a way that minimizes the adverse effects on the quality of the output or stability of the process in order to continue with regular production. There is no technical risk to the product or process." Costs then have to be split, and "costs attributable to commercial production are not allowable SR&ED expenditures."

The default matters. If the evidence does not support ED+EP, the policy says "the context of the production run is ED+CP." You have to show a run is experimental. Commercial is what the CRA assumes otherwise.

One project can contain both kinds. A single experimental development project can include several runs, where "one or more could be" ED+EP "while the remaining would be" ED+CP. Your first run of a new die on a borrowed line might be ED+EP. The later runs on live orders, while you fine-tune it, are likely ED+CP.

Selling the output does not decide it

What you do with the parts afterwards does not settle the question. In the CRA's words, the "subsequent sale of production output, whether it results in a profit or a loss, or any other subsequent use of production output from a production run does not determine whether the context of the production run is ED+EP or ED+CP."

This cuts both ways. Scrapping a commercial batch does not make it experimental. And selling off test output at a discount does not make an experimental run commercial. The policy calls a sale of experimental production "normally only incidental or secondary" to the experimental work.

The sale still matters for the materials, though. More on that under recapture below.

How the CRA tells an experimental run from a commercial one

The test is technical risk. A run is ED+EP "when there is a technical risk to the process or product, provided that the technical risk be attributable to the technological uncertainties." The policy says this risk "arises mainly because of the need to test process parameters (including combinations thereof) outside normal established process, procedures, ranges and tolerances."

So a trial where you push feed rates, temperatures, pressures or tolerances past where you normally run, without knowing what will happen, points to ED+EP. A tweak you make carefully inside your normal window, so orders keep shipping, points to ED+CP.

Section 2.2.1 of the policy lists the technical signs. In short:

• The change is big enough that you can't predict how it will affect the process or the product.
• The process could go unstable: inconsistent output, interruptions, stoppages, "or even equipment damage."
• The efficiency of the new setup is uncertain, and yield losses could run "over and above normal yield losses."
• The new product or process is different enough from your normal operating states that you can't predict the result.

Then the evidence. Section 2.2.2 says "suitable records must support the rationale for the context of each production run as ED+EP." The CRA's list of evidence includes these, among others:

• Specific experimental operating instructions, written as part of the original project plan.
• Senior management authorizing a run that carried technical risk.
• Close monitoring by technically qualified people, or extra technical staff or supervision on the line.
• Designed experiments, with test data monitored and analysed.
• Production quantities sized to the experiment only, or a smaller quantity than normal.
• A dedicated experimental line, or a production line "borrowed solely for this purpose."
• Large incremental SR&ED costs, or SR&ED costs that were significant against standard production costs.

The CRA adds a caution that matters. The list "is not an exhaustive list nor is it intended to be used as checklist." Then: "the number of factors met is not relevant," "no one factor carries a greater weight than another," and "no one factor, in isolation, is determinative." Ticking five boxes after the fact won't do it. The records have to show the risk was real at the time.

What you can claim on an experimental run (ED+EP)

On an ED+EP run you can claim the labour, materials and (under the traditional method) overhead of the output the test needed. You cannot claim anything for excess production.

Salaries. The policy allows "salaries of employees who are directly engaged in experimental development work resulting in the required experimental production." Machine operators can count too. The CRA's Salary or Wages Policy, section 7.1.1, sets two conditions for non-specialized staff. Their work "must be directly in support and be an integral part" of the experimental development. And it "must be supervised by staff with scientific or technological qualifications." The policy's own examples include "operating a machine for the purposes of an experiment that requires the use of this machine" and "feeding raw materials into a machine for the purposes of an experiment." The same section says maintenance, repairs and materials handling do not count as directly engaged work under the proxy method.

Materials. Both kinds count on an ED+EP run. "Cost of materials consumed in the ED+EP is an allowable SR&ED expenditure." Materials transformed into the needed experimental output are allowable too. Materials transformed in excess production are not. Our SR&ED materials guide covers consumed versus transformed in depth, including the 90% rule and the 10% resale line.

Overhead. Under the traditional method only, and only if "directly related and incremental to the prosecution of SR&ED." If you use the proxy method, you don't claim overhead line by line.

Sale proceeds. You don't net them off: "any proceeds from the sale of experimental production should not be taken into account when determining the SR&ED expenditures attributable to experimental production." The sale triggers recapture on transformed materials instead.

One cost is never claimable on either kind of run: input materials used before the experimental part of the run starts. These are "attributable to the commercial production, since there is no experimental production carried on."

What you can claim on a commercial run with a test inside (ED+CP)

On an ED+CP run, you can claim only the extra cost the experiment caused. Everything you would have spent to make that product anyway is commercial production.

The policy is direct about labour: "All costs usually incurred for the normal commercial production must be excluded from the claim. Only the excess costs associated with the experimental development work are allowable."

And about materials: "Only the additional (incremental) costs of materials consumed or transformed because of the experimental development occurring during the production run are allowed." Standard inputs don't become SR&ED because the experiment needed them. The policy says "the fact that standard materials (those normally used for commercial production) are required for the prosecution of experimental development does not make their cost an allowable SR&ED expenditure."

The most useful line for a machine shop is about extra scrap. "Costs relating to the incremental loss of materials resulting from their processing may be claimed as cost of materials consumed in SR&ED, provided that the loss is reasonably attributable to the experimental development." The CRA's suggested estimate: "the cost related to the actual loss of materials minus the cost related to the standard loss of materials resulting from processing."

That is why your normal scrap rate matters. If you don't know your standard loss on a part, you can't show the extra loss the trial caused.

Overhead follows the same incremental rule: allowable under the traditional method "if the costs are directly related and incremental to the prosecution of SR&ED," and not allowable where it is "attributable to commercial production."

The incremental cost method, and the waiver that comes with it

When you can't split SR&ED costs from commercial costs item by item, the CRA offers a shortcut for ED+CP runs. Section 3.2 calls it the "Alternative approach – Incremental cost method." It works with either the traditional or the proxy method.

The math is one subtraction: "the difference between the actual costs incurred for the ED+CP production run minus the standard production costs attributable to commercial production without experimental development." You don't need to prove each line item is incremental on its own. Where you have no standard cost, the CRA "will accept a comparable cost chosen by the claimant and supported by evidence."

There is a catch, and it is a real one. You can use the method only if all three conditions are met:

• It is impossible to isolate the SR&ED work, for both you and the CRA.
• The CRA agrees the approach fits.
• You agree to it "and has signed a waiver of the right to object or appeal under subsection 169(2.2) of the Act." The policy explains why: "this approach is not founded in law and is only available on an administrative basis."

Read that third condition twice. You give up your objection and appeal rights on the result. Without a joint agreement, "only the cost attributable to substantiated SR&ED work can be considered."

There is one more limit. If you file with this method and the CRA finds the work could have been split, it "will accept the use of this alternative approach, but not for years subsequent to the first CRA review where the claimant utilized this approach." Treat it as a fallback, not a filing strategy.

The CRA's own worked examples

The policy includes two examples, and both are worth knowing because they show the CRA's math, not ours.

Example 1: a commercial run with a test inside (ED+CP), incremental cost method. A five-stage continuous process. Experimental development runs from stage 3 to stage 5, so stages 1 and 2 are all commercial production. The traditional method is used. The CRA's figures for stages 3 to 5, in thousands of dollars:

• Specialized staff doing the experimental work: actual 10, standard 0, incremental 10.
• Non-specialized staff: actual 32, standard 30, incremental 2.
• Materials consumed: actual 20, standard 7, incremental 13.
• Materials transformed: actual 100, standard 91, incremental 9.
• Overhead: actual 38, standard 32, incremental 6.
• Total: actual 200, standard 160, incremental 40.

"The allowable SR&ED expenditure is $40,000." The run cost $200,000, and one fifth of it qualifies. Under the proxy method, the CRA says the figure "would be $34,000 because overhead expenditures cannot be specifically claimed under this method." When the product is sold, recapture applies "only on the allowable $9,000 of materials transformed."

Example 2: an experimental run (ED+EP). A textile maker modifies a weaving machine to raise the production rate by 50%. Test runs produce poor fabric, sold at $15 a metre, that cost $40 a metre to make: $4 of materials wasted (consumed), $5 of materials transformed into the fabric, $20 of directly engaged salaries and $11 of overhead. The CRA's research and technology advisor found 1,000 metres "reasonable and necessary for the SR&ED."

The result is $40,000 of qualified SR&ED expenditures under either method. Under the proxy method, the $11,000 of overhead is replaced by a prescribed proxy amount of 55% of the $20,000 of salaries, which is also $11,000. The ITC at 35% is $14,000. Because the fabric was sold, the CRA recaptures 35% of the $5,000 of transformed materials, $1,750. The net ITC is $12,250. Note what did not happen: the $15,000 of fabric sales was not subtracted from the claim.

An illustrative trial on a machine shop line

The CRA's examples skip two things manufacturers ask about: the provincial credit and recapture on a part you ship. Here is one with both. The numbers are illustrative. They are not from a real claim, and they show the method only.

The setup. An Ontario CCPC stamps brackets for a customer. Its engineers design a new progressive die to cut out a secondary operation. They don't know if the part will hold tolerance at the new feed rate, and existing know-how can't tell them. That is the SR&ED. The die is trialled on live orders over one shift, with care to keep shipping good parts, so the run is ED+CP. The company uses the traditional method and keeps standard costs for the part in its ERP.

The inputs (actual run cost, standard cost for the same output, difference):

• Engineer on the line, directly engaged: $8,000 actual, $0 standard, $8,000 incremental.
• Press operators: $12,500 actual, $11,000 standard, $1,500 incremental. The extra time is the operators running the trial under the engineer's supervision.
• Material scrapped (consumed): $9,000 actual, $3,000 standard, $6,000 incremental. This is the extra loss over the normal scrap rate.
• Material in parts shipped (transformed): $40,000 actual, $36,000 standard, $4,000 incremental.
• Overhead directly tied to the trial: $7,000 actual, $6,000 standard, $1,000 incremental.
• Total: $76,500 actual, $56,000 standard, $20,500 incremental.

The credits. Provincial credits are government assistance, and the CRA says they reduce the federal qualified expenditures, per its assistance and contract payments policy. So the provincial credit comes off first, then the federal rate applies to what's left:

• Ontario Innovation Tax Credit at 8%: 8% × $20,500 = $1,640. See our Ontario credit guide for who qualifies.
• Federal base after the provincial credit: $20,500 − $1,640 = $18,860.
• Federal enhanced credit at 35%: 35% × $18,860 = $6,601.
• Total: $8,241, about 40.2% of the incremental cost. Adding the two rates as 43% would overstate it by $574.

The trap this avoids. Claiming the whole $76,500 run would put $56,000 of commercial production into the claim. That is the exclusion in paragraph (i), and it is the kind of number a reviewer finds first.

Recapture on the shipped parts. The $4,000 of transformed material went out the door in parts the customer paid for. Under the CRA's recapture policy, the federal ITC earned on that material can be taken back. The amount is the lesser of the ITC earned on the property and a calculation based on the proceeds. Here the federal ITC on that material is about 35% × ($4,000 − $320) = $1,288, so that is the most the federal recapture could be. The $6,000 of consumed scrap is different. The production runs policy says the CRA "generally does not apply the ITC recapture rules on materials consumed." Labour and overhead are never recaptured. Our recapture guide covers the timing and the forms.

If the run had been ED+EP instead. Say the company had borrowed the press for a dedicated trial and run only the 300 brackets it needed to measure. With experimental operating instructions written up front and an engineer watching every hit, the whole cost of those 300 brackets could count. That includes materials, directly engaged labour and, under the traditional method, overhead. Any parts beyond the 300 the test needed would be excess production.

To see what your own figures might be worth across provinces, use the SR&ED calculator.

Continuous processes: where the claim starts and stops

Many plants don't run in batches. They run multi-stage continuous processes, and the policy handles those with three situations.

If the experiment is in step 3 of 5 and the run is ED+CP, steps 1, 2, 4 and 5 have no allowable SR&ED costs. The input to step 3 is the product of steps 1 and 2, and only the incremental part of that input cost counts. The transition into the experiment (ramp-up) is part of the experimental work. In the CRA's example the work "ended before the ramp-down period returning to standard production in step 4."

If the experiment runs through every step, all five steps follow the ED+CP rules.

If the change in step 3 is so large that the line from step 3 onwards is dedicated to it, and the evidence backs ED+EP, then steps 3 to 5 follow the ED+EP rules. The input to step 3 then counts in full once it is consumed or transformed, "the cost of producing the materials in steps 1 and 2" included.

For all three, transformed material that you later sell or put to commercial use is subject to recapture.

Records to keep while the run happens

The CRA decides the context of each run from records, so you need them on the day of the run, not at year end. Section 2.1 of the policy lists what you need to identify for each run:

• That the run was required for the SR&ED.
• Which section of the facility was involved, and why that part of the line or process.
• How long each run lasted, meaning the time needed to evaluate or validate the change.
• Who did the SR&ED.
• Which materials were used.

On a shop floor, that usually means a short trial-run sheet signed before the run. It should state the change being tested, the parameters you'll move outside normal ranges, and what you'll measure. Add a scrap or weigh log for the run against your standard loss, and timesheets booked to an SR&ED job number. The job costing in your ERP gives you the standard cost the incremental method needs.

Write the risk down before you run. "We expected this might jam the feed" is evidence when it's in an email the day before. Written after a review starts, it is a story.

Contract work changes who claims. If a test lab, a machine shop or an engineering firm runs the trial for you, see our guide to SR&ED contract expenditures for the 80% rule and who gets the credit.

Who should not bother with a production run claim

Not every trial is worth claiming. Be honest with yourself on three points.

The extra cost is small. On an ED+CP run, the claim is only the difference from standard. A tweak that cost one extra hour and a few kilograms of scrap may not justify the records.

There was no real uncertainty. If you knew the change would work and just needed to confirm it on the line, that is closer to commissioning or quality control. Routine testing is excluded from SR&ED.

You can't produce a standard cost. Without a standard or a supported comparable cost, you can't show the increment. The claim then rests on line-by-line proof you may not have.

How Glauq handles production run claims

Glauq runs the whole claim for you. Your engineers stay on the floor, and we do the paperwork. On production runs, our work starts before the run: we help you set up the trial-run sheet, scrap log and time split, so the ED+EP or ED+CP call rests on records made at the time.

Here is what happens from there:

1. Your records come to us. Upload the files you already keep: trial sheets, scrap tickets, travellers, test results, timesheets and your ERP's job-cost reports. Or connect the tools where they already live, and we pull them for you.
2. AI finds the projects. Glauq reads those records and picks out the trials and redesigns that didn't work the first time. It groups them into likely SR&ED projects and flags each run as experimental or commercial.
3. Your engineering lead confirms them. We send your lead a few short questions about each project: what you didn't know, what you tried and what you measured. Their answers become the technical record, in their words.
4. We build the numbers. We work from your payroll, materials and job costing. On a commercial run, we take the actual cost minus your standard cost, so only the extra the test caused goes in.
5. A specialist reviews the claim. A named SR&ED expert checks every project against the CRA's test and every dollar against its record before anything is filed.
6. We file it and stand behind it. We prepare the T661 and the schedules. If the CRA reviews the claim, we answer for it with you.

Our fee is flat and agreed up front. It does not grow with the size of your claim.

Frequently asked questions

Can I claim SR&ED for a trial on my production line? Yes, if the work done during the run is SR&ED to begin with. The CRA's production runs policy then sorts the run into ED+EP (an experimental run with technical risk, where the needed output's costs can count) or ED+CP (commercial production with a test inside, where only the extra cost counts). If the evidence doesn't support ED+EP, the run is ED+CP by default.

What is the difference between ED+EP and ED+CP? ED+EP is experimental development whose output is experimental production: the run exists to test a change and puts the process or product at technical risk. ED+CP is experimental development done at the same time as commercial production, usually while you keep normal output stable. On ED+CP, the CRA says "costs attributable to commercial production are not allowable SR&ED expenditures."

If I sell the parts from an experimental run, does the run stop being SR&ED? No. The policy says the sale of production output, at a profit or a loss, "does not determine whether the context of the production run is ED+EP or ED+CP." You also don't subtract the sale proceeds from the claim. The sale does trigger ITC recapture on transformed materials. The CRA generally does not recapture on consumed materials, labour or overhead.

Can I claim the extra scrap from a trial on a commercial run? Yes, if the extra loss is reasonably attributable to the experimental development. The CRA suggests estimating it as the cost of the actual material loss minus the cost of your standard loss. That only works if you know your normal scrap rate for the part.

What is the incremental cost method, and should I use it? It is the CRA's alternative approach for ED+CP runs where SR&ED costs can't be split from commercial costs: actual run cost minus standard production cost. It needs the CRA's agreement and a signed waiver of your right to object or appeal, because the CRA says it "is not founded in law." Use it only when the work truly can't be isolated.

Does a pilot plant count as an SR&ED production run? Yes, and it is the simplest case. The policy says "the production output from the operation of a pilot plant is experimental production," so a pilot plant run is ED+EP. Output beyond what the SR&ED needed is still excess production and doesn't count.

A trial on a live line is a legitimate SR&ED cost. It just has to be claimed as the trial, not as the whole run. Decide ED+EP or ED+CP before the run, write the risk down, and keep your standard costs handy.

Testing changes on your line this year? Check if your work qualifies or estimate your refund.