Canadian Legal Technology Is Worth Watching (and May Qualify for SR&ED)
Updated to Reflect New Policies (2022)Â*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. ***Â |
The future of Canadian legal technology and its eligibility for SR&ED.
The latest Canadian technology generating significant press is legal technology. “Legal technology” is any technology, from artificial intelligence to digital analytics, that lawyers are using. Lawyers are directly investing in and being used as test subjects for this new technology. Â
According to an article published in early 2017 in Canadian Lawyer, “law firms are the leaders at this time in developing and applying data analytics.”1 These data analytics enable lawyers to predict the outcomes and timelines of court cases, determine the likelihood of winning a case, and obtain other information that can help their practices. Â
Legal technology can also help lawyers find new clients and vice-versa. According to a follow-up article published in Canadian Lawyer later in 2017, there are 1,400 companies working on legal technology worldwide, and those companies have attracted more than US $1 billion in investment.2Â
Incubating Legal TechnologyÂ
In the article, Jim Middlemiss notes that legal tech has grown at such a rate that a number of incubators have started up recently to help small companies that invest in the technology grow in size and stature. International legal firm Allen & Overy launched Fuse in September 2017, providing a space for tech companies to collaborate with the firm and its clients when developing legal technology solutions.
Mishcon de Reya LLP launched its MDR Lab incubator in January 2017 and, exactly one year prior to that, Canada’s Osler Hoskin & Harcourt LLP partnered with Toronto’s Ryerson University to launch its incubator, the Legal Innovation Zone. As of August 2017, its portfolio included 15 companies.Â
Legal firm Dentons launched NextLaw Labs in the spring of 2015, and now boasts IBM as one of its partners. NextLaw also provides venture capital to those who invest in legal technology. The incubator has 10 portfolio companies, including three with Canadian connections: Beagle Inc., FileFacets and ROSS Intelligence.3
What’s more, various events have been held in the Canadian technology scene geared towards legal technology. In June 2017, Toronto hosted a legal technology “hackathon,” in which participants had 48 hours to work on a piece of software geared towards the legal industry.4 There have also been a number of “pitch events,” where participants (usually start-up technology companies) have “minutes to make their case in front of a panel of judges” in order to “win” investment and seed money.5 Â
Legal Technology May Qualify for SR&EDÂ
As with all new technologies, it is quite possible that legal technology may qualify for SR&ED tax incentives, so long as it resolves a scientific or technological uncertainty and applicants have done their homework and followed the scientific method – and kept copious documentation. Â
A Recent Court Case of InterestÂ
A recent Tax Court of Canada ruling highlights the importance of following the scientific process for research that may be eligible for an SR&ED tax credit. In Flavor Net Inc. v. the Queen, Flavor Net (the Appellant) was a beverage manufacturer that was trying to win an SR&ED appeal on two projects related to inserting plant sterols into one of its health drinks. The problem was that, according to the court, the Appellant did not do its due diligence when setting out to solve the problem of increasing the amount of plant sterols in its beverage. Â
The Appellant had not come up with a hypothesis and did not, in its documentation to the Canada Revenue Agency, adequately show how it had resolved a technological uncertainty in its experimentation. The case was dismissed largely on these grounds. Â
The court noted that “there is no doubt that the appellant was trying to develop a new product. There is always uncertainty in developing a new product. That said, not all new product development is faced with technological uncertainty.”6Â
Therefore, if you develop a new legal application for a smartphone, it does not necessarily mean that your work qualifies as SR&ED. This is why the process of product development, including determining the risks and technological uncertainty, is so important when applying for SR&ED tax credits. Â
Provide Evidence of Your ResearchÂ
Although the Appellant in Flavor Net Inc. v. the Queen failed to win its case, the court did note that “the appellant provided examples of its records of experiments. The logs contain entries for the various nutraceutical emulsifiers that were mixed with the sterols and record the effects of variables such as temperature and mixing method on the dispersion of the sterols. This is sufficient to establish that the appellant undertook trained and systematic observation.”6 However, this did not automatically qualify the appellant’s work as eligible.
Suffice to say, it’s important to track your work for SR&ED. It will help you give proof of the explanations you provide in your T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim.
ConclusionÂ
If the legal technology trend continues, it is likely that we will see small firms in this field claiming SR&ED tax incentives. We advise that when completing the T661, you should be sure to answer the questions set out in the form as thoroughly and specifically as possible. Keep track of your experimentation work and the results. Even if you fail to develop a new product, if you are adding to the scientific or technological knowledge base, you can still apply for an SR&ED tax credit.