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9158-1629 Québec Inc. v. The King (2022)

*** This information is presented for educational purposes only and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual tax situation. *** 

9158-1629 Quebec INC. v. The King (2022)

 Key Lessons / Points

  • Documentation
    • Maintaining a well-organized and complete collection of documentation is imperative for the success of SR&ED applications.
    • The last of the five questions used to determine the eligibility of work for SR&ED Investment Tax Credits pertains to the collection of documentation regarding hypothesis development and testing, and the results thereof.
    • Documentation regarding expenditures and time spent on SR&ED is also imperative for SR&ED applications.  For more information see SR&ED Salary and Wages Policy as well as Materials for SR&ED Policy.
  • Systematic investigation or search
    • Projects claiming SR&ED credits should follow a systematic investigation or search, involving defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results.
    • It is important to distinguish between a systematic approach and the approach that is a systematic investigation or search. Routine engineering or standard practices would be considered a systematic approach as the work performed does not address scientific or technological uncertainty to increase your company’s knowledge base relative to its state before the project and above the overall industry’s knowledge base through scientific or technological advancement. 
  • Witness testimony
    • Providing an expert in the field of SR&ED conducted can be crucial for projects to be seen as SR&ED versus routine engineering. 

Fiscal Years in Question 

2015

Court Heard In 

Tax Court of Canada (Quebec)

Dates Heard 

April 27 and 28, 2022

Length of Process

7 years

Neutral Citation 

2022 TCC 137

Docket 

2018-2699(IT)G

Amount Under Dispute 

$32,451

Decision 

[34] The appeal made under the Income Tax Act with respect to the 2015 taxation year is dismissed, without costs.

Summary 

The Appellant, Andrzej Borzym, together with 9158-1629 Quebec INC., sought to appeal an assessment by the Canada Revenue Agency (CRA) for the 2015 tax year. The Appellant claimed expenditures related to scientific research and experimental development (SR&ED) totaling $131,104 in connection with two projects. The first project focused on developing a propane tank vending machine that ran on electricity and accepted credit card payments. The second project involved building a machine capable of manufacturing rollers and was aimed at significantly reducing the cost to manufacture rollers.  The Appellant asserted that they were entitled to an investment tax credit of $32,451. The judge noted that nearly all of the expenses incurred for these two projects were paid to Automation Machine Design, the company that performed the work.

In this case, the Appellant had previously developed a propane tank vending machine that accepted coins. A patent application for this vending machine was submitted in 2007 in the United States and 2006 in Canada. A United States patent was granted in 2011 and a Canadian patent was granted in 2015 for the mechanical vending machine. The Canada Revenue Agency alleged that these claims were not related to experimental development expenditures within the meaning of the Income Tax Act (the “Act”) and denied the Appellant’s investment tax credit.

The Appellant argued that the CRA’s officers who reviewed the claim were not qualified as they were not mechanical engineers. Additionally, they argued that expert witness provided by the CRA was not qualified to do so. The judge ruled that both CRA officers had more than the necessary credentials and were qualified to review the work and to provide expert testimony.

The judge used the scientific research and experimental development (SR&ED) definition within subsection 248 of the Income Tax Act, Canada (the “ITA”) and considered the five criteria set out by the Federal Court of Appeal in CW Agencies Inc. v. Canada (2000).  The judge ruled, “Considering all the evidence, I am not persuaded that the Appellant attempted to resolve technological uncertainties using the scientific method in order to achieve technological advancement or progress, and that these uncertainties could not be removed through routine engineering or standard procedures.”

Key Excerpts 

[4] In 2015, the Appellant spent a total of $131,104 in connection with two projects; it claimed that these were expenditures related to scientific research and experimental development activities (the “experimental development expenditures”). The Appellant asserted that it was therefore entitled to a $32,451 investment tax credit.

[6] It should be noted that the Appellant had previously developed a completely mechanical propane tank vending machine that only accepted coins.

[7] Patent applications relating to the mechanical vending machine were filed in 2007 and 2006 in the United States and Canada, respectively. A patent was granted for this mechanical vending machine in 2011 in the United States and in 2015 in Canada.

[8] The proposed vending machine in question in this case was to run on electricity and accept credit cards.

[9] The second project involved building a machine that could manufacture rollers. The goal was to significantly reduce roller manufacturing costs.

[10] Nearly all of the expenses incurred during the year for these two projects were paid to Automation Machine Design, the company that performed the work.

[11] The Canada Revenue Agency claims that these were not experimental development expenditures within the meaning of the Income Tax Act (the “Act”), and it denied the Appellant’s investment tax credit.

[13] The work at issue here is neither basic research nor applied research. The issue is whether this is experimental development within the meaning of the above definition.

[14] Five criteria have been set out in the case law in order to assess whether a particular activity constitutes experimental development within the meaning of the above definition. These criteria were summarized as follows by the Federal Court of Appeal in CW Agencies Inc.

[18] Firstly, these allegations do not account for the fact that, with respect to the facts taken for granted by the Agency as part of its assessment, it is the Appellant who has the burden of proving the contrary, which was not done in this case. I will return to the Appellant’s evidence later in these reasons.

[27] Mr. Borzym provided a general description of both projects. He testified about some of the difficulties and uncertainties encountered during the projects.

[28] However, his testimony was quite general. In particular, there was no detailed testimony and detailed documentation showing that the Appellant, or Automation Machine Design, had:

  • (i)systematically formulated hypotheses specifically aimed at overcoming uncertainties;
  • (ii)made a systematic effort to verify and, if necessary, modify, the hypotheses; and
  • (iii)provided a detailed record of this work.

[29] Absent such detailed evidence, I find that such systematic efforts were not made. Without such efforts, problems must be solved using commonly known procedures and basic knowledge.

[32] Considering all the evidence, I am not persuaded that the Appellant attempted to resolve technological uncertainties using the scientific method in order to achieve technological advancement or progress, and that these uncertainties could not be removed through routine engineering or standard procedures.

[33] Consequently, there was no experimental development within the meaning of the Income Tax Act.

Link to Full Ruling 

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Related Ruling

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