Case Study

Let’s tie it all together with a case study and walk through it step by step. We will lay out all the facts and then you can use the knowledge that you have to create a rough SR&ED claim. We will put the solution at the end so you can compare your answers to the answer key.

The company we will be looking at is Peace Eagle Manufacturing Inc. It is a corporation incorporated in British Columbia, owned 100% by Bill Turner, a Canadian resident. They develop metal fasteners for connecting electronics into machining devices.

Today’s date is August 31.

Facts about the corporation

  1. The Company’s year-end is December 31.
  2. The T2 for the year was already filed in June.
  3. This is the third year they are filing a SR&ED claim.
  4. Qualifying SR&ED salaries and wages & expenditures were not separately recorded in the trial balance, but the Company has kept track of the expenses that they feel will qualify for SR&ED purposes.

Polymer binding machine: $150,000.

Monthly salaries working on the project: $50,000.

There is $2,000 in material for the first prototype.

$3,000 in materials for the second prototype.

$4,000 in materials for the third prototype.

$76,000 in materials for the commercial production between September and December.

Contractor in July through September: $30,000. $6,000 of which was for unrelated regular machine maintenance on other machines.

Bill determined in January that the company was going to develop a new product, the universal fastener to replace the current line of 47 different fasteners that depend on the machine and the electronic interface. Engineers were assigned to the project and designed and built an initial prototype over the first 3 months of the year.

During testing of the initial prototype, a fatal flaw was detected, due to the material properties of the metal used, the cabling proved to be too brittle and couldn’t withstand the flexibility requirements of the project to be universal. This is not an issue with standard fasteners as the standard fasteners don’t require flexibility as they can only be used in one application.

The engineer determined that this could be addressed by developing a new prototype material that consists of interlocking galvanized steel cores while wrapping it in a more flexible PVC jacket. The reason for this is to have a fibre that can absorb the strain and transfer the stress back to the steel cores.

The engineer spent the next few months developing a new prototype of cabling. Analysis after development found that the PVC jacket allowed for greater flexibility and the steel cores allowed for great crushing resistance, the interlocking steel cores would break easily when the angular curve exceeded 30 degrees or when the fibre was stretched longer.

The team determined that the curvature requirements could be met by changing both the PVC jacket and the core to different materials. The engineer hypothesized that a single thread gallium metal core surrounded by a polymer sheath could meet these requirements.

A specialist polymer contractor was hired to develop the prototype of this new material and a new polymer binding machine was purchased while the project engineer worked on the metal core.

By the end of September, the prototype was developed and testing found that angular curvature could reach 80 degrees and the cable could stretch up to seven times its original length. Bill determined that the project was complete at this point and the project was ready to move into commercial production.

From September to November, the production was prepared and the universal fastener was available for sale in December.

Calculate the eligible expenditures for the project.

Case Study: