Tax Court Canada SRED Ruling

Avoid SR&ED claim denial by learning from Logitek Technology vs. The Queen

While most people don’t often think about what’s happening at the Tax Court of Canada, taking the time to read through their website can yield some gold nuggets of useful information.

Throughout the SREDucation.ca Gold Nugget series, I’ll dig up some of the most informative hearings and judgments from the Tax Court of Canada—especially in terms of how not to apply to the SR&ED program.

Today, I bring you Part 2 (read part one here) of my personal favourite portions from Logitek Technology Ltd. v. The Queen (2008, T.C.C.). In this appeal, Logitek were claiming additional investment tax credits to the tune of $106,557.

Hope That the Crown Relies on Questionable Reasoning

Perhaps my favourite part of this specific ruling is the extra time the Judge takes to describe the belief that the Crown’s argument allowed for an interpretation of SR&ED that was too narrow.

[28] In light of this conclusion, it is not necessary that I consider the evidence presented by David Dutch for the Crown. However, I would comment briefly that I have some difficulty with some of the reasoning in Mr. Dutch’s report. Specifically, it appears that Mr. Dutch may have approached the problem on the basis that activities would not qualify as SR&ED if there was an existing computer program in the market that solved the technological problem that was identified by Logitek. It is not entirely clear to me that Mr. Dutch took this approach, but if he did, I have some difficulty with it because I do not think that the statutory provisions are so restrictive.

The next paragraph, which we analyze in greater detail here in Part 1 of our Logitek Gold Nugget post, is a pure gold nugget for anyone looking to drive home a point with the CRA. Even ignoring the weakness of the report itself, Logitek were at a disadvantage even before the appeal was made.

[30] The weaknesses of Mr. Dutch’s report do not help Logitek in its appeal, however, because Logitek failed to establish that the work constituted SR&ED. The burden of proof should be on Logitek, particularly because its argument had changed from what was stated in its notice of appeal.

Be Prepared to Wait

While the Logitek appeal was in reference to a claim made for the 2000 tax year, it was not heard in the Tax Court of Canada until 2008. Be prepared to wait a long time for your case to be heard, particularly if it gets drawn out in appeals.

Be Prepared to Pay

In total, the Appellant lost his originally claimed tax credit ($106,557) plus the time and associated costs of going to court—which can be up to an additional $100k. Ask yourself if the time saved in sending a hastily prepared SR&ED claim is worth the financial burden.

Avoid these issues—and others that may arise—by ensuring that you engage professionals when preparing your claim. It could literally save you hundreds of thousands of dollars.

 

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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.


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