TEXTILE INDUSTRY GUIDANCE DOCUMENT

For
Scientific Research & Experimental Development

15 January 2002

1. BACKGROUND

The Textile Industry

The Canadian textile manufacturing industry has transformed itself dramatically since the early 1970s and during this period has embarked on a substantial and sustained program of capital investment. This has resulted in an industry that is modern, efficient, and a major user of high technology. In an environment characterized by global rather than regional competition, the industry has become increasingly innovative. This fact was recognized in a report, Innovation in Canadian manufacturing enterprises (Statistics Canada: Catalogue no. 88-513-XPB) in which the textile industry was ranked among the top R&D performers in Canada, not only nationally but also on a world-scale.

The evolution of a textile product from its elementary fibres to the end-use application occurs through many stages or tiers of development. The textile manufacturing industry is characterized by the vertically integrated nature of these tiers. The following are examples of some of the members of the textile manufacturing industry:

• producers of natural/ man-made fibres and filament yarns;
• processors and converters of yarn and spinners;
• producers of fabrics destined for garment manufacturers, as well as a wide range of institutional and industrial end-uses;
• firms specializing in the dyeing of fibres and yarns;
• firms specializing in the dyeing, finishing, coating and printing of fabrics;
• firms specializing in the post-processing of finished fabrics, that is the ultimate users.

More than one of the above areas of technological expertise can and does reside within the walls of a single operation. In many cases, the development of a particular technology is co-dependent on companies both up and downstream from any one firm. In most cases, the final determination of the performance of any article produced by a"textile" company is determined by the downstream user and ultimately by the final tier for the development of the finished item. This issue is important and will be dealt in greater depth further in this document.

Another element that characterizes the industry is the degree to which experimental development is conducted directly on the plant floor using commercial scale equipment and processes. This trend is driven by factors common to many technology companies:

• time to market pressures;
• product driven technology development;
• the limited predictability of laboratory or pilot trials when scaling-up to commercial conditions.

1.1 SECTOR COMMITTEE

The industry structure in Canada is highly integrated, complex and multi-dimensional. Most of the technological developments are undertaken by specialists with not only academic qualifications but also with years of practical experience. A sector committee of experts possessing vertical specialties as well as particular knowledge across different horizontal technologies was assembled to address the specific needs of the textile community with respect to the Government of Canada's SR&ED Program. The members of the committee are presented as follows:

Eric Barry - Canadian Textiles Institute
Daniel Low - Lagran Canada Inc
Guy Daragon - Lagran Canada Inc
Alex Di Palma - Consoltex Inc.
Peter Nuessler - Consoltex Inc.
Pierre Mandeville - Cavalier Textiles
Nancy Pereira - DIFCO Performance Fabrics Inc
François LaPierre - DIFCO Performance Fabrics Inc
Robert Perrier - Cleyn && Tinker
Jozien Vet - J.L. de Ball Canada Inc
Max Maurice - Stedfast Inc
François Simard - Stedfast Inc
Stuart Zuckerman - Doubletex Inc
Marcel Pinchevsky - Pinchevsky && Co
Bernard Descamps - Canada Customs and Revenue Agency
Mark Bobra - Canada Customs and Revenue Agency
Suzanne Boutin - Canada Customs and Revenue Agency
Al Turak - Canada Customs and Revenue Agency

1.2 PURPOSE OF THE GUIDANCE DOCUMENT

The purpose of this guidance document is to present a framework that specifically addresses the issues of the Textile Industry and allows companies to apply these SR&ED guidelines to this specific business environment. This document should assist companies to more clearly identify projects and work, which in turn will aid them in identifying appropriate expenditures, which meet the definition of Scientific Research & Experimental Development (SR&ED) in section 248(1) of the Income Tax Act.

Because of the product driven nature of SR&ED in the industry, it is important that claimants segregate routine development projects from those that are SR&ED, both of which are usually conducted on the same plant floor. A key consideration regarding this issue should be the following definition from the information circular 86-4R3:

"By definition, and according to sound professional practice, routine engineering practice does not involve appreciable scientific or technological uncertainty." .... "The three criteria of IC 86-4R3 must be applied within the context of the taxpayer's business environment."

This document was prepared to elaborate on the Project Definition document as published March 20th, 2000 on the CCRA Web Site. The sections that follow present a number of models, clarifications and examples that should serve to achieve the following:

• Distinguish between experimental development and"routine work";
• Explain the relationship between technological development and"product development";

Upon dealing with the above distinctions, the SR&ED performer should be in a position to establish a methodology for segregating an SR&ED project from all other projects in the organization. Furthermore, this document should also serve to clarify project definition-related issues such as the following:

• When does the project start?
• When does the project end?
• What is the nature of the work that is associated with the conduct of the SR&ED?

1.3 CONSIDERATIONS AND INDUSTRY FRAMEWORK ISSUES

VERTICAL RELATIONSHIP

As noted earlier in this document, the Textile Industry consists of vertical relationships whose members or participants do not generally possess all of the knowledge or skill set necessary to conduct a project from the source fibre (natural or man-made) through each tier until a final textile is prepared for the end-use. In fact, a textile, whether destined for consumer or industrial use, will only see its final use in the tier that adapts the textile into its ultimate usable form, such as a swimsuit, a fire protective garment, a hockey skate, a bullet-proof vest, etc. The definitive conclusion as to the degree to which a textile meets the performance objectives can sometimes be assessed only by a customer who generally is not a member of the Textile Industry.

Consequently, the completion of some projects may not be determined until the textile leaves the premises of the company and is tested in the intended end-product environment to determine if it meets the technical objectives.

THE EVOLUTION OF A TEXTILE PRODUCT

The evolution of a textile product typically starts with a single fibre or a blend of fibres and ends up as a functional end product such as a pair of jeans, a bullet-proof vest, or an inflatable air-plane escape chute, to name a few. The common evolutionary pathway for the tiers of a textile product is to first go from a fibre to a yarn. The yarn is then woven or knit into a fabric. The fabric is then dyed, coated, or printed, and then finished. The finished fabric is then adapted into its final end-use form.

The requirements of an end-use product are the ultimate goal of the textile development. These requirements may necessitate development at any or all of the textile evolutionary tiers; fibre, yarn, fabric, dyeing, coating, printing, finishing, etc. The ultimate physical and chemical properties of the desired end-use product are dependent on the physical and chemical treatments that occur along every tier of the development. The results of each textile tier are highly dependent on the processes used at each of the other tiers. The type and blend of fibres used will affect the yarn properties, which will affect the fabric properties, which will affect the dyeing, coating, printing, and finishing which will in turn affect the end-use properties.

• A yarn can be developed to meet a specific set of requirements, but when that yarn is woven and dyed, the fabric may not meet its requirements, making it necessary to define a new set of requirements for the yarn which may in turn require further development of the fibres.
• The yarn developed from the newly developed fibres may meet the yarn requirements, but now the new fabric created from the yarn does not take up the dyestuffs.
• There can be a very fine balance between all of these tiers. A seemingly simple change at any one of these tiers may set off a chain reaction of developments.

A particular difficulty facing the textile industry is the fact that all of these tiers are extremely interdependent, but they all do not necessarily exist within the same company. A particular textile company may encompass all, some, or only a single tier in the evolution from fibre to finished fabric. In the extreme case, each tier may be developed by a different company.

Due to this segmental nature of Textile Industry, the customers of many textile companies are other textile companies, i.e. a fibre manufacturer will have a yarn spinner as a customer, who will in turn have a knitter as a customer, who in turn will have a dyer as a customer, and so on. Each of these companies will receive their technical specifications from the company immediately ahead of them that represents the next development tier. In most cases, the companies lower on the textile evolutionary scale will be unaware of the end-use product's technical specifications.

TECHNOLOGY VS PROJECT

The Textile Industry company, like that in many other sectors, does conduct SR&ED for the sole purpose of advancing its knowledge-base. Such development work is generally conducted in the early tiers of a new technology such as new fibre or yarn technologies, a switch from acid to water base dyes, new hybrid fibres and/or textiles. However, once this early tier development has been conducted it may form the foundation for further experimentation and technological advances.

The next tier, which takes on a very different focus, is the development of a technology with a distinct need to bring a product to the market. This can be a totally new product or an improvement in the performance of an existing product. In its early stages, the technological development paths can readily be followed. Consequently, each new development can readily be followed as a"trial" on the path to advancing the technology.

However as market demand increases, the original obvious paths become blurred through an overlap and variation of technologies. Each of the projects now begins to appear as a product development project that within its own development can now incorporate its own experimentation or trials.

For example, in the early stages of the Lycra© and Tencel© fibre related developments, the technology path was usually clear. But as the foundations were set, manufacturers could pursue product developments that blurred the path through blends and combinations from other technologies such as"wicking" technologies.

In many cases, distinguishing between product development and technology development becomes difficult as the manufacturer undertakes the project. With respect to the Income Tax Act, this distinction is irrelevant because regardless of whether the development work is technology-driven or product-driven, a development project is assessed to determine if it meets the criteria of SR&ED. It is important to distinguish between product development that requires advancement in technology and product development that does not (i.e. product development based on routine engineering). Refer to section 3.2 on Page 11.

INDUSTRY CHARACTERISTICS

In the Textile Industry, like all other market driven industries, time-to-market is critical. Consequently, a number of industry characteristics are typical and these must be taken into consideration since they represent the business context of the claimant. It is important that each claimant describe as clearly as possible the business context and the technology of the company.

• Large number of trials
  Even the smallest of manufacturers undertake a significant number of development projects, of which several hundred of these trials may meet the criteria of SR&ED. Where it is possible, projects having technological commonalities can be grouped into larger, more coherent projects. This grouping, however, is not always feasible for all trials. Therefore, in these cases, the company should designate each unique trial as a separate project.
   
• Shop level development
  The most qualified resources available to conduct a SR&ED project are management, staff, and operating personnel who are most experienced in the particular technologies. Generally many of these persons have several responsibilities and it is important to clearly identify the SR&ED responsibilities from any other responsibilities such as management, marketing, routine development and production.

  Furthermore, the prototyping or proof-of-concept is often conducted using equipment which is also used for regular commercial production. Records must be maintained as to when this equipment is utilized for experimental purposes in order for the claimant to successfully support the claim.
   

• Experimental quantities
  Laboratory scale or small-scale quantities are mostly used in order to assess the technology to be developed as well as providing a prototype that can serve as a determinant as to when the objectives have been attained. As noted later in this document, resolution of certain technological uncertainties may require experimental trials using full-scale production equipment resulting in large-scale batch quantities. It is important that these pre-production trials are clearly distinguished from normal commercial production and that records be maintained which substantiate that these trials were experimental and were focussed upon the resolution of technological uncertainties.
   
• Product and process developments
  The nature of textile development makes it difficult to separate product development from process development. A product development may require a simultaneous development of the textile process. This co-development arises from the inter-dependence of each of the development tiers. As stated earlier in"THE EVOLUTION OF A TEXTILE PRODUCT", a modification to one tier's parameters may affect the results of the subsequent tiers, thereby requiring development of each successive tier until the final objective is achieved.
   
• End of Projects
  Due to the nature of the textile industry, a particular developer may be unable to ascertain whether the project has reached the technological objectives until the product is adapted and tested in its final form.

  For example, a developer of fire-retardant fabrics may have to target performance characteristics of the final fire-retardant garment as the project objectives. If the fabric developer does not also produce the garment, then the fabric developer cannot test the final performance characteristics to determine if the project objectives have been met. In this case, the fabric developer becomes dependent on the garment maker's time-frame and testing. The fabric developer must keep the project open until the time that the fabric satisfies the technological objectives of the garment within the garment maker's environment. This type of field-testing is usually at negligible cost to the actual fabric developer, but it is an integral aspect of judging the success of the project and therefore the end of the project.

  For this type of field-testing to be SR&ED, it must be demonstrated that the testing directly addresses technical issues related to the overall technological objectives of the SR&ED project. To this end, it is the claimant's responsibility to ensure that the technological objectives presented for each SR&ED project reflect the potential off-site field-testing objectives as well. Field-testing of a non-technical nature such as market demonstrations is not eligible.

  A development project may remain open until the time that the technological objectives in the field (i.e. in the hands of the subsequent tier) have been achieved. It should be noted that if the fabric satisfies the technological demands of the subsequent tier, but this subsequent tier refuses the fabric due to commercial criteria, then the project must still be considered as complete due to the satisfaction of the technological objectives.
   

• Short Time Frame
  Time to market is a critical factor. In many cases, the primary determinant whether the project has met its technological objectives is if the product meets the technical performance specifications established by the subsequent tier who will ultimately develop the textile into its final form. Consequently, a particular stage, trial, or even project can be conducted in a matter of days or weeks rather than months or years.

1.4 GENERAL ISSUES

The Claimant Model for SR&ED - Segregate Routine Development from SR&ED
It is important to note that the application of a known development methodology does not necessarily imply routine work. At the outset of an SR&ED project, the issues that do not permit the predictable resolution of the technological uncertainties should be identified.

In routine development projects, the technical challenges can usually be resolved within the existing knowledge base of the claimant.

The distinction should be made at the outset of the project.

Thus it is the identified project itself that must meet the criteria of SR&ED as presented below. The SR&ED model presented further in this document should serve to clarify the work which is associated with the SR&ED project.

Simplifying the Claim Process
Within the context of evaluating an SR&ED project, it is important to distinguish between experimental and routine work, as well as between experimental development and commercial projects. It is important for claimants to clearly demonstrate how they apply the three criteria of SR&ED to their projects and to demonstrate the process used to differentiate SR&ED projects from non-eligible projects. CCRA's review of a claim will be simplified where the claimant can substantiate that the three criteria of SR&ED are understood and are correctly applied. In effect, CCRA reviewers can then focus more on reviewing the selection process used by the claimant to identify eligible SR&ED projects instead of reviewing the individual projects.

Ultimately, the onus is on the claimant to demonstrate eligibility by providing evidence that the work meets the criteria of SR&ED. In assessing the eligibility of a project, the CCRA technical reviewer has to decide whether or not eligible work occurred and the point in time when the eligibility started and ceased. The stronger the evidence provided by the claimant, the easier it is for the technical reviewer to verify the claim for eligibility.

2. NATURE OF EXPERIMENTAL DEVELOPMENT

2.1 STATUTORY AND GENERAL DEFINITIONS

Subsection 248(1) of the Income Tax Act defines scientific research and experimental development (SR&ED) as follows;"... systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis... " Here, technology refers to the practical application of knowledge, a capability given by the practical application of knowledge, a manner of accomplishing a task especially using technical processes, methods or knowledge, or the specialized aspects of a particular endeavour.

Subsection 248(1) of the Income Tax Act goes on to define the following categories of scientific research and experimental development:

1. basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
2. applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
3. experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products, or processes, including incremental improvements thereto, and, in applying this definition in respect of a taxtpayer, includes
4. work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research, where the work is commensurate with the needs, and directly in support of the work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer.

   Subsection 248 (1) of the Income Tax Act further states that SR&ED does not include work for:

5. market research or sales promotion;
6. quality control or routine testing of materials, devices, products, or processes;
7. research in the social sciences or the humanities;
8. prospecting, exploring, or drilling for or producing minerals, petroleum, or natural gas;
9. the commercial production of a new or improved material, device, or product, or the commercial use of a new or improved process;
10. style changes; or
11. routine data collection.

2.2 SR&ED DEFINITION

In the application of the following criterion, a clear definition of the project is important. The following set of criteria are defined in the CCRA Information Circular, IC 86-4R3.

It is not the overall purpose of the work or program, but rather what is actually occurring at a technical level that is relevant. This is an important point because the intent of all development in a business context is to produce viable products or processes. Thus the key point relating to the Act is whether or not the work has the characteristics of an eligible scientific research and experimental development, and not the overall goals in a commercial sense.

General criteria

Essential tests that must be met before any work can be considered scientific research and experimental development include the criterion of scientific or technological advancement; the criterion of scientific or technological uncertainty; and the criterion of scientific and technical content.

The criterion of scientific or technological advancement is as follows:

• In basic and applied research advancement in scientific knowledge is achieved.
   
• In experimental development work is undertaken for the purpose of achieving technological advancement. There is no requirement for the"advancement of knowledge" To achieve a technological advancement implies moving the technology base of the company to a higher level at the end of the attempt from where it was at the beginning of the attempt.

The criterion of scientific or technological uncertainty is as follows:

• Whether or not a given result or objective can be achieved, and/or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience. This criterion implies that we cannot know the outcome of a project, or the route by which it will be carried out without removing the technological or scientific uncertainty through a program of scientific research or experimental development. Specifically, scientific or technological uncertainty may occur in either of two ways:
  • it may be uncertain whether the goals can be achieved at all; or
  • the claimant may be fairly confident that the goals can be achieved, but may be uncertain which of several alternatives (i.e., paths, routes, approaches, equipment configurations, fabric construction, process, etc.) will either work at all, or be feasible to meet the desired specifications or cost targets, or both of these.
     
• The scientific or technological uncertainty, rather than the economic or financial risk, is important in characterizing scientific research and experimental development - and, hence, eligible work.
   
• Sometimes there is little doubt that a product or process can be produced to meet technological objectives when cost targets are no object. In commercial reality, however, a reasonable cost target is always an objective, and attempting to achieve a particular cost target can at times create a technological challenge which needs to be resolved. A technological uncertainty may thus arise that is imposed by economic considerations.
   
• This criterion applies equally to work on new or existing processes or products.

The criterion of scientific and technical content is as follows:

• The scientific research and experimental development activity must incorporate a systematic investigation going from first concept formulation, through testing by experimentation or analysis, to the statement of logical conclusions. Such experimentation can include work on the evolution of prototypes or models. In a business context, this means that the objectives of the scientific research and experimental development projects must be clearly stated at an early stage in the project's evolution. In addition, the method of experimentation or analysis by which the scientific or technological uncertainties are to be addressed must be clearly set out. Finally, the results of the succeeding scientific research and experimental development efforts have to be properly identified. The need for a systematic program of investigation does not preclude ideas that result from intuitive processes. Such ideas are hypotheses, however, and must still be tested through a systematic program before they can be accepted.
   
• Qualified personnel having relevant experience in science, technology, or engineering are responsible for directing or performing the work.

2.3 APPLYING THE THREE CRITERIA

The fundamental core of a textile SR&ED project is uncertainty. Uncertainty is necessary, but not a sufficient condition for SR&ED. The technological uncertainty must be accompanied by a systematic investigation intent on advancing the company's technologies. In other words, there must be attempts made at resolving the technological uncertainties. "Living with" a problem or uncertainty without attempting to solve it does not qualify as SR&ED. In experimental development, the pathway and/or outcome are uncertain because the present level of technology (state-of-the-art) is insufficient. Resolving the technological uncertainty will result in a technological advance, and it is the work on resolving these uncertainties that characterizes eligible experimental development projects.

3. CHARACTERISTICS OF THE SR&ED PROCESS

3.1 THE SR&ED MODEL

The following paragraphs present a general model of a textile product or process development project. The purpose of this presentation is to provide the claimant with a model that provides a reasonable framework against which a multi-faceted project undertaken by development and operational staff can be evaluated. Regardless of the size or scope of a project, each of the stages presented below can form an integral part of a SR&ED project.

The textile industry is generally product or process driven. The stimulus for initiating or continuing a project is the demand from the marketplace. In practical terms a development project is initiated at the moment the marketplace requests a product for which the claimant does not possess the specific know-how and therefore must conduct SR&ED to develop it. It is appropriate to present a product or process development project as SR&ED as long as the focus remains on technological development issues and the scope of the project embodies the three criteria of SR&ED.

Furthermore, it is recognized that within the business context of a company, it may be uncertain that standard practice will lead to the desired objective. Under most circumstances, it is clear at the outset of a project, that the existing technological knowledge-base is insufficient to develop the product or process. In certain cases, a project that starts as a routine work can result in an SR&ED project when the results deviate from expectations.

In the textile industry, the development of this technological knowledge-base is closely linked with a new or improved product or process. Generally, it is the initiation of a systematic investigation through analysis or experimentation to advance the technology and to resolve a technological uncertainty that identifies a SR&ED project and distinguishes it from routine projects.

START OF A TEXTILE SR&ED PROJECT
For a given company, an SR&ED project starts when the company experts recognize that the solution is beyond the company's present knowledge or beyond technology readily available in the public domain and cannot be resolved using its standard practises. In general, there are two times that this recognition occurs; the moment the customer requests a product which requires development of a new technology, or the moment an unforeseen problem is encountered.

• Commonly, the company experts can tell immediately that a particular request is beyond their present base of knowledge or technology, therefore requiring SR&ED. In this case, the project starts the date the customer request is received. For this example, the product development is the project.
• On occasion, a product that was classified as routine by the company experts encounters unforeseen problems that cannot be resolved by the use of known technology. When this occurs, the product is reassessed by the company experts and may become an SR&ED project if it is deemed that the resolution of the unforeseen problems cannot be achieved using known technologies. In this case, the date of the SR&ED project is the date that the problem was encountered. Note that this does not necessarily mean that the work performed between receiving the request and encountering the problem is ineligible. For such"pre-problem" work to be eligible, the claimant would have to substantiate a direct link between the prior work and the newly established SR&ED project.

END OF A TEXTILE SR&ED PROJECT
The end of a textile SR&ED project usually occurs when the same company experts acknowledge that the technological objectives have been met. Different companies have different methods to track this event, but there is typically some sort of"approval" mechanism initiated either internally or by the customer.

FIVE STAGES OF A TEXTILE SR&ED PROJECT

A five-stage model of a typical textile project includes Development of the Concept, Detail Development, Laboratory Scale Analysis and Experimentation Proof of Concept and Pre-production Scale -up. Details of these stages are provided below. While these five stages are not always described by companies in the format given here, they are, nevertheless, involved in some manner in most technological developments. Variations to the model do exist and are to be expected. Also, it should be noted that it is not possible to establish time frames and expense parameters for any of these stages.

3.1.1 STAGE 1 - DEVELOPMENT OF THE CONCEPT

This stage incorporates important work such as the following:

• translation of the marketplace functional requirements into technical specifications as developed internally, or as provided by the customer or both;
   
• depending on the knowledge-base available to the company, determining the general technical parameters which should be followed by the company;
   
• at this stage, the project may not constitute SR&ED if:
  • it has been determined that the objective to develop the product or process can be achieved with little or no uncertainty; or
  • it has been determined that the project is not feasible and is abandoned.

At this stage, when the issues are sufficiently clear, it is possible to determine whether the existing technological knowledge base of the company is adequate to meet the objectives. Consequently, this is the ideal stage for determining whether the project will be SR&ED or not. Where a"routine" project changes its nature in the course of its development, the"return to the drawing board" will demand that the developers return to this stage to review the initial concepts and reformulate the concepts for the project.

3.1.2 STAGE 2 - DETAIL DEVELOPMENT

Based on the Stage 1 concepts, the details for the development of the first samples are initiated. Each of the parameters for the fabrication is established. Depending on the company, parameters such as the following are defined:

• basic chemicals, filaments, yarns to be incorporated;
• chemical formulations;
• process conditions and sequences;
• equipment conditions, accessories and set-up.

3.1.3 STAGE 3 - LABORATORY SCALE ANALYSIS AND EXPERIMENTATION

Based on the detailed development, one or more laboratory trials may be conducted. It should be noted that not all companies conduct laboratory trials.

Failure at this stage would normally demand a return to Stage 1 or Stage 2.
Stage 3 usually represents the initial technical assessment.

3.1.4 STAGE 4 - PROOF OF CONCEPT (PILOT SCALE)

Initial sample products or processes are developed under limited volume conditions. Although such a small-scale trial does not completely determine the final operating parameters, it does permit the company to reduce the risks and costs of larger scale testing.

This stage usually incorporates the use of reduced scale equipment or smaller production lots than that would be considered normal for the claimant.

Where conditions do not permit pilot scale experimentation, the company may decide to skip this stage and experiment in a production-scale environment.

A failure at this stage would normally demand a return to Stage 1.

This stage usually represents an initial proof of concept.

3.1.5 STAGE 5 - PRE-PRODUCTION SCALE-UP

In general, the routine"scaling-up" from pilot scale is not eligible. However, specific SR&ED work may occur during this phase that is eligible. The key issue is whether there is a technological uncertainty still to be overcome that will result in technological advance, or whether this stage can be carried out through standard practise.

Most industrial textile processes cannot be accurately replicated by pilot scale development. Stage 5 is critical in determining the product or process parameters that will result in meeting the technological objectives set in Stage 1. It is at this pre-production scale-up stage the technological uncertainties surrounding the project are to be resolved. In other words, the final conclusion of whether the technological uncertainties are resolved may not be determined until Stage 5.

Any uncertainties that were unknown in the previous stages would normally come to light in the full-scale volume experimentation. Any problems at this stage of SR&ED would normally manifest themselves in product that does not meet project objectives. Further experimentation may be conducted in smaller scales or at this full-scale volume.

Indicators of full-scale experimentation are usually found in the resulting off-specification product, non-standard scrap levels or non-standard labour efficiencies.

This stage represents the resolution of the full scale operating parameters and technological uncertainties.

This stage of experimentation ends when the repeatability of the technology has been determined and steady state has been achieved. Once this occurs, the technology can be considered stable and commercial production in place.

Routine"scaling-up" is not SR&ED. If the"scaling-up" of a particular project can be accomplished using known practices with a predictable result, then no technological uncertainties exist making this stage ineligible for this given project.

3.2 SR&ED PROJECTS VS NON-SR&ED PROJECTS

The Textile Industry is extremely competitive and specific technological know-how is generally acquired from within an organization. Consequently the evaluation of what is SR&ED or non-SR&ED is dependent on the business context of each claimant. The following table presents a number of indicators and examples that should serve to clarify some of the factors that are typical to SR&ED and non-SR&ED projects. A careful consideration of the claimant's business context must be used in the application of the indicators.

The differentiation of SR&ED and non-SR&ED projects is not necessarily reflected in the number or type of the five stages, but rather in the nature of the work conducted in the stages. Some textile companies follow the exact same stages for both routine work and SR&ED developments, while other companies have a different set of stages for each pathway.

The distinction between routine projects versus SR&ED stems from the relative uncertainties or the objectives of the projects. How these relative uncertainties translate into differences in work performed depends on the business context of each particular textile company.

A routine project has little or no uncertainty and is therefore often streamlined through the five stages with little supervision or intervention from the company experts. Routine work is based on standard practice (e.g. minor modifications, trouble shooting, de-bugging, etc.) where the pathway and outcome are predictable. Routine projects normally follow regular production cycles and are subject to the normal company quality assurance guidelines and tests.

• Experimental development has appreciable challenges that lie outside of the knowledge base of the company experts. In experimental development, the pathway and/or outcome are uncertain because the present base of technology is insufficient. There are technological uncertainties about whether the overall technological objectives of the project can be achieved. Resolving the technological uncertainty will result in a technological advancement. For this reason, the company experts closely monitor the systematic investigation of the SR&ED. Many companies have a very formal SR&ED protocol (including a distinct nomenclature), while other companies are far less formal. The SR&ED development cycle is often characterized by incremental advancements in technology at each stage occurring only after multiple experimental iterations.

For the general 5-stage approach outlined in this document, it can be said that the work performed in a routine project versus an SR&ED project will be the same at stages 1 and 2. as regardless of the degree of uncertainty of the project, the concept and details must be developed.

For an SR&ED project, stages 3 to 5 are an integral part of the cycle and are less frequently skipped or hastened. More often than not, the SR&ED cycle requires several experiments at any given stage and may require returning to an earlier stage for re-work. Routine projects can skip any or all of stages 3 to 5 depending on the uncertainties and objectives.

The classification of projects as either SR&ED or non-SR&ED should be the responsibility of company experts. This filtering process typically begins in Stage 1 of the projects. The company experts' background and experience is usually sufficient to grade the level of uncertainty of each project and therefore choose the appropriate development pathway. There are always exceptions. Some seemingly uncertain projects will advance through the SR&ED cycle without any problems. Some seemingly routine projects may "hit the wall" at an unforeseen problem and will therefore be shifted back over to the SR&ED pathway.

Examples of Development Projects

Potentially SR&ED	non-SR&ED
New situation with special properties, i.e. width, thickness, tensile strength New fibre New spinning process New dye type New printing process New chemical or mechanical finish	Changing the blending ratio of an established 2-fibre composite yarn. Change of yarn source Developing a new shade within an established dye colour family. Change of weaving tension Development of print designs and after woven processes

General Indicators

Potentially SR&ED

non-SR&ED

A great deal of input and supervision by company experts is required Does not resemble regular production cycle Developmental stages are rarely skipped Minimal quantities at each stage are used. Testing performed at each stage is done solely to ensure that the objectives are met and is clearly beyond quality control requirements. Production runs are slower than normal solely as a result of above normal, intensive monitoring. Some stages require several experimental iterations Often a distinct"development number" is assigned to the project

Little input/supervision from company experts Closely resembles regular production cycle Developmental steps are often skipped Larger than minimal quantities are used at a given stage Testing is done mainly for quality control of the finished product Low degree of monitoring and standard rate of production Few steps need repeating Regular production numbers are assigned to routine projects

4. SUMMARY & CONCLUSION

The purpose of this guidance document, as it applies to the Textile Industry, is to provide the claimant and CCRA with a framework against which to assess a number of important issues surrounding SR&ED The document describes the nature of development projects in the textile industry and the"tier" system of product development in the sector, and provides guidance for differentiating"routine" product development and SR&ED.

SR&ED is carried out in the textile industry in an environment characterized by the following:

• Development is generally in the"shop-floor";
• Usually there are large number of trials;
• Large quantities of material can be consumed in SR&ED due to testing on production size equipment;
• "End" of SR&ED projects may be delayed beyond delivery of product due to testing requirements at customer's facilities.

The document also introduces a typical textile project model with five stages of development and describes how work can be SR&ED in this framework. The existence of a well-defined and documented SR&ED model helps support the SR&ED claim from both the technical and financial perspective.