Analysis of 2024 SR&ED Legal Rulings
In 2024, there were five legal rulings that dealt with Scientific Research and Experimental Development (SR&ED) issues. In this post we analyze the legal rulings and how lessons learned from others can help you with your future SR&ED claims.
Out of five rulings, only two were successful for the claimants. The successful rulings included DAZZM Inc. v. The King (2024), and Manning Canning Kitchens Inc. v. The King (2024).
Common Issues
Our analysis of the 2024 SR&ED legal rulings showed a few main themes:
- Technological uncertainty. This concept was an issue in three rulings.
- Documentation. This concept was an issue in two rulings.
- Burden of Proof: This concept was an issue in two rulings.
Technological Uncertainty
The Canada Revenue Agency (CRA) defines technological uncertainty as:
Scientific or technological uncertainty means whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of technological knowledge.1
Additionally, the CRA explains:
[…] the available knowledge is the combined scientific or technological knowledge of the resources within your business and those sources that are reasonably available to you publicly.2
Technological uncertainty is the most common theme among the 2024 SR&ED legal rulings. In 2024, of the three cases dealing with the technological uncertainty, the Appellants were able to fulfill their burden of proof during the legal proceedings in two cases.
In one of the winning cases, Manning Canning Kitchens Inc. v. The King (2024), the Judge stated:
[10] […] there was uncertainty as to whether it was technologically possible to develop a canned, shelf‐stable drink which contained cold‐pressed juice as a main ingredient. At the time, there was no such product on the market. The closet comparable products on the market at the time were heat‐treated and stored in glass bottles, making them much more expensive.3
In the other winning case, DAZZM Inc. v. The King (2024), the Judge stated:
[99] […] there was a major uncertainty as to how to make the tools work harmoniously to produce adequate performance to obtain a practical result. This demonstrated a deficiency and that a piece of the puzzle was missing: a technological uncertainty as to how to achieve the performance that would allow the software to operate practically, and which, according to the evidence, the techniques, procedures, and data that are generally available to competent specialists in the field have failed to resolve. It is this overall problem that constitutes the technological uncertainty in this case.4
The type of uncertainty present in DAZZM Inc. v. The King (2024) is known as ‘system uncertainty’. We have discussed this type of uncertainty in our article “SR&ED in Software Development: What is System Uncertainty?“.
In the case which was lost, Biscuiterie Dominic Inc. v. The King (2024), the Judge stated:
[80] On the basis of the evidence, the Court also concludes that the appellants tried to use methods that were, essentially, already known in order to solve the problems, methods that often had been suggested by the suppliers, who had more knowledge than the appellants. By proceeding in this manner, the development of new knowledge by the appellants in and of itself does not constitute an SR&ED activity if there is no technological uncertainty that the company is attempting to solve when the standard procedures and routine engineering have proven insufficient.5
These legal ruling emphasize the importance of performing comprehensive background research before beginning your SR&ED project, as the CRA will not award you for gaining knowledge which previously existed.
Documentation
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.
The CRA’s guide to the T661, the form used to claim the SR&ED tax credit, says the following under the heading “Supporting the SR&ED Work Claimed”:
Contemporaneous documentation that is dated, signed, and specific to the work performed are the best supporting evidence that you can provide.6
In the case of Manufacture Kute Knit Inc. v. Revenue Quebec (2024), which was a loss, the Judge stated:
[20] The only evidence the appellant submitted was a table in which it listed the names of the employees in the two groups and attributed to each of them a percentage of the total time it stated had been spent on the SR&ED projects. Other than this table, the appellant did not file supporting documents regarding the percentages set out therein, be they time sheets, SR&ED progress reports, correspondence, minutes of meetings, internal notes or emails related to these tasks, nor did it file any other document likely to contain an indication that these employees worked on the SR&ED for the percentage of their time listed in the table.7
In the case of Manning Canning Kitchens Inc. v. The King (2024), which was won, the Judge stated:
[30] […] it is important keep in mind that the purpose of such documentation is to enable the party conducting the research to keep track of the hypotheses formulated, the tests conducted and the results of such tests to facilitate proper follow up action. Ms. Manning’s testimony indicated that the documentation kept by Manning Canning, a sampling of which was submitted at trial, fulfilled this purpose. I accept that evidence.3
While documentation is not mandatory in order to claim SR&ED, a lack of supporting documentation listed on your SR&ED claims will raise questions and likely result in your SR&ED claim being pulled for review. The presence of adequate documentation shows the CRA that you carried out a systematic investigation as is called for in SR&ED. Furthermore, if your claim is selected for review, the presence of high quality and comprehensive supporting documentation can make or break your case. Maintaining a well-organized and complete collection of documentation is imperative for the success of SR&ED applications. See our article “Why do I need contemporaneous documentation for SR&ED?” for more information about supporting documentation for SR&ED.
Burden of Proof
In proceedings before the Tax Court, including those involving SR&ED claims, the burden of proof rests with the Appellant. The applicable standard is the “balance of probabilities,” meaning the Appellant must demonstrate that their position is more likely than not to be correct. This standard is lower than the “beyond a reasonable doubt” threshold, which applies in criminal cases and is not relevant in the context of tax appeals. The Appellant’s evidence should establish, on a balance of probabilities, that the requirements under the SR&ED program have been met.
In the case of Manufacture Kute Knit inc. v. Revenue Quebec (2024), the judge cited the case of Alertpay Incorporated v. Quebec Revenue Agency (2020) in which the Court summarized the applicable law regarding burden of proof and the presumption of validity of tax assessments provided for in section 1014 of the Taxation Act:
[10] […]
[26] The taxpayer’s burden is to demonstrate “how the facts on which the assessment is based are incorrect. This evidence must be sufficient to convince the court, prima facie.” It must also “contain a certain degree of precision and probability in its favor” to be accepted.
[27] “Clear testimony, unshaken in cross-examination and offered by a witness whose credibility has not been questioned, while no evidence to the contrary has been presented by the tax authorities ” may constitute sufficient evidence to “demolish” the presumption. However, the simple denial of the facts relied on for the issuance of the notice of assessment is not sufficient to counter the presumption of validity.
[28] If the taxpayer meets these requirements, then the burden of proof is reversed, and it is up to the tax authority to “refute the prima facie evidence and prove the assessment made by presumption” by a preponderant of evidence.7
Regarding the case of Manufacture Kute Knit inc. v. Revenue Quebec (2024), which was dismissed without costs, the Judge stated:
[25] To succeed in “demolishing” the notices of assessment, the appellant was required to demonstrate, on a prima facie basis, that the respondent’s premise — i.e., that the appellant had not shown that the reported portions of each employee’s salary could reasonably be attributed to the prosecution of SR&ED — was false. The judge found that the appellant had not made such a prima facie demonstration, and the appellant had not shown that she committed a palpable and overriding error in this regard.7
In the related winning case, DAZZM Inc. v. The King (2024), the Judge stated:
[88] It is the appellant’s burden to demonstrate that the activities constituted SR&ED activities [3].
[91] […] The project in dispute focused on a technological uncertainty existing in the combination of tools used. Rather, the appellant’s software was the medium used to explore this uncertainty. The appellant and the evidence provided demonstrate that the appellant has discharged its burden by meeting the SR&ED test and that the respondent has not been able to overturn this finding.4
The Courts consistently emphasize that the Appellant must provide sufficient, credible evidence to substantiate their claims, whether related to the eligibility of SR&ED activities, the adequacy of supporting documentation, or the allocation of expenditures.
General Anti-Avoidance Rule (GAAR)
The General Anti-Avoidance Rule (GAAR) is set out in Section 245 in the Income Tax Act. This topic was only involved in one legal rulings in 2024, Total Energy Services Inc. v. The King (2024), and it illustrates the recent push by CRA to implement stricter enforcement of claimants attempting to wrongfully take advantage of the SR&ED program.
The CRA states:
Subsection 245(2) states that where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that would result from that transaction or from a series of transactions that includes that transaction.
An avoidance transaction is defined in subsection 245(3) as a single transaction or one that is a part of a series of transactions where the single transaction or the series results directly or indirectly in a tax benefit, unless the transaction is carried out primarily for bona fide purposes other than to obtain the tax benefit.12
A consultation paper published by the CRA, Modernizing and Strengthening the General Anti-Avoidance Rule, states the purpose of the GAAR:
The GAAR was intended to strike a balance between taxpayers’ need for certainty in planning their affairs and the government’s responsibility to protect the tax base and the fairness of the tax system.[Government of Canada. (January 14, 2025). Modernizing and Strengthening the General Anti-Avoidance Rule: Consultation Paper. Retrieved April 2, 2025, from: https://www.canada.ca/en/department-finance/programs/consultations/2022/general-anti-avoidance-rule-consultation/modernizing-strengthening-general-anti-avoidance-rule.html]
In the case of Total Energy Services Inc. v. The King (2024), which was lost, the Appellant attempted to imbue their company with the tax losses and benefits of another company through the purchase and acquisition of that company. These actions were determined to be a misuse and abuse of the provisions of the Tax Act. The Judge stated:
[111] […] The impugned transactions resulted in a total transformation of Xillix –a complete lack of the continuity of its identity- while imbuing a new entity with new shareholders to benefit from its tax attributes – a result completely contrary to spirit, object and purpose of each of s.111(5) in respect of non-capital losses, s.111(4) in respect of net-capital losses and s.37(6.1) in respect of SR&ED deductions. The Minister was therefore correct in denying the Appellant the losses and deductions in issue in this appeal using the GAAR.13
See our articles “Enforcement Notifications: Fraudulent SR&ED Claims & Tax Evasion” and “Gross Negligence Penalties: A Step Backward for SR&ED Claimants?” for more information on how the CRA is addressing the uptick in fraudulent or dishonest SR&ED claims.
Key Rulings Cited as Precedence
Northwest Hydraulic Consultants v. The Queen (1998)
In three of the five cases last year, the judges used Northwest Hydraulic Consultants v. The Queen (1998) as legal precedence. In all three of these cases the judges cited the Five Questions of Eligibility which Justice Bowman laid out in this ruling:
1. Is there a technical risk or uncertainty?
2. Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
3. Did the procedures adopted accord with established and objective principles of scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?
4. Did the process result in a technological advance, that is to say an advancement in the general understanding?
5. Although the Income Tax Act and the Regulations do not say so explicitly, it seems self-evident that a detailed record of the hypotheses, tests and results be kept, and that it be kept as the work progresses.14
The judges ran through these five questions in regard to the evidence presented to see if the work conducted met all five criteria. If the work failed just one, it is considered to be ineligible for SR&ED investment tax credits. These five questions were incorporated into the Eligibility of Work for SR&ED Investment Tax Credits Policy, which was archived and replaced with the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives in August of 2021. The continued use of this case in tax court shows that the use of Justice Bowman’s 5 questions is still the standard in defining SR&ED eligibility. See our article “Are the Five Questions still the SR&ED standard?” for more information. We have also written an article on the evolution of those five questions: “The 5 Questions For SR&ED – Intent and Evolution“.
Full List of 2024 SR&ED Legal Ruling Summaries
We have summarized and pulled the key lessons from each of these 2024 SR&ED legal rulings for our clients convenience:
- Manufacture Kute Knit inc. v. Revenue Quebec (2024)
- DAZZM Inc. v. The King (2024)
- Manning Canning Kitchens Inc. v. The King (2024)
- Total Energy Services Inc. v. The King (2024)
- Biscuiterie Dominic Inc. v. The King (2024)
If you are not a client of ours the full legal rulings can be found here:
- Manufacture Kute Knit inc. v. Revenue Quebec (2024)
- DAZZM Inc. v. The King (2024)
- Manning Canning Kitchens Inc. v. The King (2024)
- Total Energy Services Inc. v. The King (2024)
- Biscuiterie Dominic Inc. v. The King (2024)
Conclusion
The presence of technological uncertainty and contemporaneous documentation are recurring themes which if done improperly or not at all can lead to the denial of SR&ED ITCs. Taking an issue to trial is a costly and lengthy process, therefore, if one is able to come to an agreement or arrangement with the CRA versus going to trial it may be more advantageous for all parties involved. Ensure you review the CRA’s SR&ED Glossary before completing an SR&ED application as the language of the definitions is particular in nature. Familiarity with key terms such as knowledge base, scientific and technological uncertainty, scientific and technological advancement, and experimental development is highly beneficial. Be aware that in a court of law the burden of knowledge falls on the claimant. Prevent costly mistakes by documenting your SR&ED every step of the way.