While gauging the SR&ED eligibility of our clients’ projects, we often find that they are afraid to speak about failed prototypes, product designs or any setbacks they encountered during the development process. In many cases, the failures and impediments that you encountered could in fact strengthen your SR&ED claim.
This includes cases where the work did not result in a commercial product, or where prototypes failed during testing or did not perform as expected.
Here are some common misconceptions about prototype eligibility:
You can’t claim if you have no market-ready product.
This is false. The SR&ED program focuses on the process of resolving uncertainties, not on whether a sellable product exists at the end.
Only the final prototype counts.
Also false. All experimental iterations, including early-stage, partial, and failed prototypes, can be claimable if they were part of the systematic investigation.
You need to prove commercial value.
The CRA does not require proof of commercial viability. The requirement is technological advancement, which can occur even in a project that never reaches market.
From an SR&ED perspective, the generation of new knowledge is central to eligibility. This knowledge can be just as valuable as discovering a working solution, and it often informs future projects. The CRA acknowledges that failed prototypes can contribute to a body of technological knowledge, which is one of the program’s key criteria.
In short, your prototypes can qualify if:
You faced a technological uncertainty.
The outcome of your research and development could not be easily predicted based on existing knowledge or standard practices. Therefore, you conducted iterative and experimental development in an effort to address technological uncertainties.
You followed a systematic investigation.
This involves a process of formulating one or more hypotheses, creating iterative experimental designs, and testing/evaluating the results of your work in an effort to resolve an uncertainty.
You gained new knowledge.
As part of your experimental development, you gained new insights about why your prototypes failed to achieve a desired outcome, thus contributing to an advancement in technological or scientific knowledge.
There is evidence that your prototyping was necessary to achieve new knowledge.
Designs of prototypes are a valid proof of the experimental development processes that took place as long as they are a critical part of a structured attempt to solve a technological dilemma.
Claiming failed prototypes under SR&ED is not only possible, it is fully supported by CRA policy. The key is to ensure that the work involved genuine technological uncertainty, was conducted through a systematic investigation, and is supported by strong documentation. In many cases, the story of multiple failed prototypes can make for a stronger SR&ED claim because it demonstrates that the outcome was unknown and could not have been determined without experimentation.
If approached correctly, failed prototypes are not wasted effort, they are both a learning opportunity and a potential source of valuable tax credits.
