Are the Five Questions still the SR&ED standard?
On May 3, 2022, the Federal Court of Appeal ruled on a scientific research and experimental development (SR&ED) related case, National R&D Inc. v. The Queen (2022) and its implications regarding the use of the Five Questions from Northwest Hydraulics v The Queen (1998) are significant. This article will focus on the impacts of this ruling and the question, “Are the Five Questions still the SR&ED standard for eligibility?”
What determines SR&ED eligibility?
According to the current policy documents, the determination of SR&ED eligibility is guided by the “how” and “why” as described in “Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives“:
Work must be conducted for the advancement of scientific knowledge or for the purpose of achieving technological advancement1
Work must be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis (contained in the beginning of the definition).1
The guidelines do not explicitly discuss the five questions any longer. They are also not considered a policy document but a guideline which differs from prior versions. When the guidelines were released on August 13, 2021, they also released a statement:
The definition of SR&ED given in subsection 248(1) of the Income Tax Act has not changed. The new guidelines feature simplified explanations of our program requirements, clear breakdowns of what constitutes eligible work, and links to further guidance on what you can claim and how to support your claim.1
It has not been clear if the five questions of eligibility must still be followed for work to be considered SR&ED eligible. The National R&D ruling has finally provided guidance.
Analysis of the ruling
The judge’s ruling in National R&D Inc. v. The Queen (2022) indicates that the Five Questions of Eligibility from Northwest Hydraulic are still the standard for determining SR&ED eligibility in the courts. His statement that “while the CRA guidance is useful context in understanding the purpose and intent of a particular provision, it is not binding on the court.” is significant. If CRA guidance (or the policies) are not binding on the court how is one to know what to follow to determine their SR&ED eligibility and what to include in their SR&ED claim?
Justice Rennie stated:
The criteria relied on by the judge are not ultra vires subsection 248(1), rather they reflect the court’s understanding of what Parliament intended by subsection 248(1) (Kam-Press at para. 6; see also Justice Robert Sharpe, Good Judgment: Making Judicial Decisions, “The Generality of Law” (Toronto: University of Toronto Press, 2018) at 54). Parliament and the legislatures rely on the courts to give definition, amplitude and precision to statutory language as required by the circumstances of the case. The resulting understanding of legislation as expressed in the jurisprudence is not an improper exercise of judicial legislation, rather it is precisely what courts are required to do: “Generality gives the law its objective, rational, and systematic quality. It is what distinguishes the law from the judicial decision applying it” (Sharpe at 54).4
This statement shows that the court is to make rulings based on the intent of the legislation. This is a point that is important because it shows that intention matters and while the wording of the CRA guidance from August 2021 does not include each of the Five Questions, they are still intended to be used as a baseline to establish SR&ED eligibility.
Justice Rennie also stated:
While the new CRA guidance no longer uses the precise language of the “scientific method”, the “The ‘How’ requirement” section of the CRA guidance still speaks to the requirement of an underlying rigour or discipline in the experimental process.5
This shows that while the CRA changed the wording of the guidance to “plainer” English, the underlying meaning is still the same as the original policy and the Five Questions.
Lessons Learned
- The Five Questions are still standard – the new policy language does not detract from the legal precedence.
- CRA guidance is not binding on the court.
- The TCC is to issue judgements based on the intent of the legislation.
Conclusion
This case shows that the Five Questions from Northwest Hydraulic remain the standard when determining SR&ED eligibility. When the “Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives” were released it was unusual that it was not titled as a new policy but as guidelines. We were uncertain how the August 2021 guidelines would hold up in court versus a CRA policy; now that it has been challenged in court, legal precedence shows that the old “Eligibility of Work for SR&ED Investment Tax Credits Policy – 2015” may still be valid. Taxpayers who intend to file SR&ED claims would benefit from ensuring they are able to answer all Five Questions of eligibility in case their claim is called into question. For a full summary of this ruling please see National R&D Inc. v. The Queen (2022).