SR&ED Business Context – Lessons from the Tax Court of Canada
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Many changes to SR&ED are the result of court rulings that helped define issues and clarify the SR&ED application requirements.
Here we feature some key rulings from the Tax Court of Canada that have affected how the SR&ED program is delivered and what these rulings have meant for claimants.
We’ve discussed business context in SR&ED and our Comprehensive Guide to SR&ED has more information about recent and historic Tax Court of Canada rulings and where they have been cited by the CRA in SR&ED policy.
“Technological Advance” Better Defined
In Northwest Hydraulic Consultants Ltd. v. The Queen, the Judge seems to say that a ‘technological advance’ is synonymous with ‘an advancement in the general understanding.’ In addition, the existence of a technological advance, if not generally known, is not a barrier to a claim’s acceptance.1
[16] “4. Did the process result in a technological advance, that is to say an advancement in the general understanding?
(a) By general I mean something that is known to, or, at all events, available to persons knowledgeable in the field.”
[16] “A technological advance in Canada does not cease to be one merely because there is a theoretical possibility that a researcher in, say, China, may have made the same advance but his or her work is not generally known.”
Claimant’s Employees Should be Aware of Common Practice in Their Field
A key point in Gestion Choisy-Tek Inc. v. The Queen is that a claimant’s employees should have the necessary expertise to know what is common knowledge/practice in their field. A lack of this knowledge may contribute to them failing to make a technological advance.2
[8] “…A technological uncertainty, on the other hand, arises when the solution is not readily apparent to someone familiar with the basic stock of commonly used knowledge and techniques within the business context of the firm.”
“The Judge appears to suggest that inexperience on the part of software developers can limit their knowledge of ‘this basic stock of commonly used knowledge and techniques.'”
[9] “Neither Mr. Lessard nor Mr. Lavallée has any academic training in computer science. They have acquired practical experience. In the years at issue, the appellant employed a young computer scientist, Sylvain Godin, who… had at most one year’s work experience.”
”This relative lack of experience was likely a factor in the conclusion reached by two other experts cited in the decision:”
[15] “The reports of the other two experts mentioned in the Reply reveal that difficult work had been done, but that it did not go beyond common professional practice in computer science.”
”This case suggests that a high level of training and experience makes a team more likely to understand the business context of the firm and whether the solution would be readily apparent to someone familiar with the basic stock of knowledge within that business context.”
[19] “The various experts agreed that the people involved here possess considerable skill in the area of computers. However, in this specialized field, successfully overcoming difficulties does not mean one has made a technological discovery … The project in the instant case was a business project … The persons involved in developing the software were not computer science graduates, with the exception of the young graduate, and in his case, he had not yet earned his first university degree and had very little work experience.”
Claimant’s Work Must Go Beyond Common Techniques
Les Éditions Progitech Inc. v. The Queen states that although the judgment as to eligibility should be made within the context of a single company and its field of business, a lack of expertise can contribute to a claimant failing to make a technological advance. In addition, while business size will be taken into account, the claimant’s work must still go beyond common techniques.3
SR&ED decisions are made in the context of a taxpayer’s business environment, but a taxpayer is expected to have access to the knowledge commonly available within his or her field of business:
[11] “…The technical uncertainties encountered by one taxpayer may well be looked upon as facts easily obtained by another. The judgment as to eligibility should be made within the context and environment of a single company and its field of business. Specifically, the activities undertaken to resolve technical uncertainties are eligible if the taxpayer cannot obtain the solutions through commonly available sources of knowledge and experience in the business context of the firm.”
Business size was taken into account, but the claimant’s work was still required to go beyond common techniques:
[12] “In the expert report … the small size of the business was taken into consideration but it was concluded that the taxpayer had not gone beyond common software development techniques.”
Currently-Existing Solution Not Necessarily a Barrier to Acceptance
Logitek Technology Ltd. v. Canada, states that a currently-existing solution is not necessarily a barrier to a claim’s acceptance.4
[28] “…it appears that Mr. Dutch (the Crown’s expert) may have approached this problem on the basis that activities would not qualify if there was an existing computer program in the market that solved the technological problem that was identified by Logitek … if he did, I have some difficulty with it because I do not think that the statutory provisions are so restrictive.”
[29] “If a taxpayer undertakes SR&ED activities to solve a technological problem, the activities should qualify, even if those SR&ED activities were not necessary because there was an existing solution in the marketplace that the taxpayer was not aware of.”
This article is presented only for informational purposes and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual situation.
