6398316 Canada Inc. v. The Queen (2021)

These summaries are presented for informational purposes only and do not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual situation. 

6398316 Canada Inc. v. The Queen (2021)

 Key Lessons / Points

  • A project must meet all the criteria laid out in the “five questions” provided in Northwest Hydraulic Consultants Limited v. The Queen (1998) case to be eligible for SR&ED. 
  • Providing an expert in the field of science or technology being claimed can be crucial for projects to be seen as SR&ED versus routine engineering.
    • In this case, the judge specifically noted the lack of expert evidence weakened the Appellants case.
  • Maintaining a well-organized and complete collection of documentation is imperative for the success of SR&ED applications. 
    • The Guidelines on the eligibility of work for SR&ED tax incentives states the collection of documentation regarding hypothesis development and testing, and the results thereof is a necessary requirement for work to be considered eligible for SR&ED ITC’s.
    • For guidance as to what documentation to collect, see the SREDucation article on the topic.

Fiscal Years in Question 

2012, 2013

Court Heard In 

Toronto, Ontario 

Dates Heard 

October 19 and 20, 2020 

Neutral Citation 

2021 TCC 17 

Docket 

2018-528(IT)G

Amount Under Dispute 

$3,485.65; $34,032.69 

Decision 

[37] In conclusion, while the work done by the Appellant is admirable, it was not reflective of SR&ED. Accordingly the appeal will be dismissed. The two appealed loss determinations made September 23, 2015 will be upheld.

Summary 

The Appellant, Global Sustainable Solutions, sought to appeal two federal Income Tax Act determinations made September 23, 2015 by the Minister of National Revenue pertaining to the Appellant’s 2012 and 2013 taxation years respectively with regards to scientific research and experimental development (SR&ED) expenditures (and accordingly refundable investment tax credits) under the Act. The claimed expenditures were incurred by the Appellant in connection with a construction project involving a house in southern Ontario, which was intended to be uniquely energy efficient while staying within the price range of a “regular home”. The initial claimed SR&ED expenditures for the 2012 taxation year had been reduced by $3,485.65 to the amount of $139,631.67; and likewise the 2013 taxation year total had been reduced by $34,032.69 to the amount of $61,752.60.  The judge used the five questions developed in the Northwest Hydraulic Consultants Limited v. The Queen [1998 DTC 1839] to evaluate the eligibility of the the appellants SR&ED ITC application. The Judge noted there was an absence of organized and specific evidence, as well as a lack of expert witness evidence pertaining to the state of technological knowledge within this industry. The Judge concluded that the work performed did not meet the eligibility requirements for SR&ED and dismissed the appellants appeal, stating the two appealed loss determinations made September 23, 2015 would therefore be upheld.

Of interest, it took six years to reach a determination (2015 to 2021) on two tax returns filed nearly a decade ago (2012, 2013). The Appellant had received a refund for each year ($139,631.67 and $61,752.60) – they were disputing the reduction of $3,485.65 and $34,032.69, respectively. 

Key Excerpts 

[2] The issue is whether the Minister erred in determining that none of the Appellant’s expenditures relating to this construction project constituted SR&ED expenditures. 

[5] The five steps per Northwest Hydraulic for identifying conduct of SR&ED are:

(a) was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?

(b) did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating the technological uncertainty?

(c) did the procedure adopted accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses?

(d) did the process result in a technological advancement?

(e) was a detailed record of the hypotheses tested, and results kept as the work progressed?

[8] At the opening of the hearing, Appellant’s counsel stated that his client’s total of claimed SR&ED expenditures for the 2012 taxation year had now been reduced by $3,485.65 to the amount of $139,631.67; and likewise the 2013 taxation year total had now been reduced by $34,032.69 to the amount of $61,752.60. 

[9] The corporate Appellant called one witness – Mr. Cory Smith (CS). At all material times CS was the Appellant’s president. Neither party called any expert evidence and the Respondent called no witnesses. 

[10] CS testified that he has experience in house construction and has earned various training certifications relating to house construction. They include a 2008 certificate from Sir Sanford Fleming College marking completion of a six month study program in “sustainable building design and construction”. He spoke of the Appellant’s project of building a small house (bungalow) in southern Ontario in 2012 and 2013, seeking that it, “can function without the need for active life support” (by which he means) “grid-tied energy for fuel”, meaning no electricity or natural gas or any other grid-tied fuel. [1] He added:

It may still use electricity and propane, depending on the circumstances, or wood for fuel, depending on the choice of the home owner, but the overall idea was to create a home that could function by manipulating the natural forces around us for a low maintenance, low impact environment, but also do it affordably at the same time so the main stream housing could [sic] market had access to a home like this. [2]

[13] CS testified that the aspects of the project upon which the SR&ED claim was based were various natural force interactions such as thermal mass, thermal bridging, passive cross-ventilation, passive heating and cooling, and air sealing. Thermal mass is the ability to absorb and store heat energy – here in the building’s concrete footings. In winter, warmer daytime temperature warmth would be released throughout the colder night. Thermal bridging is the movement of heat across an object more conducive to that than surrounding materials. For example, warm air can relatively readily migrate though wood framing from indoors to outdoors, resulting in heat energy loss. Passive ventilation is manipulating air movement within the building environment entirely or mostly absent the use of active ventilation sources, such as a furnace. Passive cross-ventilation, a term coined by CS, refers he said to an even, passive distribution of hot air and cold air. 

[15] The Appellant broke ground in August 2012 and completed the structure in the fall of 2013. CS’s evidence focused upon various passive energy steps taken in the course of construction. One such step was using rigid styrofoam to insulate around the structure’s concrete footings and as well under the concrete slab, to a significantly greater extent than utilized in usual house construction including, he said, custom built homes. Styrofoam acts as a thermal break to reduce thermal bridging. 

[16] Also, the Appellant in conjunction with a concrete contractor tried several differently proportioned mixtures of recycled material (30, 45 and 60%) within the concrete mix to see if such adjustments might helpfully affect interior thermal mass and passive cross-ventilation. Having 60% of recycled material caused the concrete to take too long to cure. The Appellant ended up staying with the standard mix of 15% of recycled material. 

[24] The home as built received an “Energuide” efficiency rating of 91 out of 100. The Energuide document (Ex. A-17) provides inter alia that the “typical rating” for a “New house built to minimum building code standards” would be “65 to 70”. It provides that the typical rating for its top category, being a “Highly energy-efficient house”, would be “80 or more”. 

[25] Per above, the first and second of the five Northwest Hydraulic steps which constitute the test for determination of SR&ED are, (a) “was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?”, and (b) “did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating the technological uncertainty?”  

[26] In oral submissions, Appellant’s counsel addressed these two steps. He submitted:

Your Honour, in questioning I submit you asked, well, in a better designed home they come with more insulation. That’s true. So there’s no trick there to just add more insulation. He sealed it up presumably again, there’s no real trick to being more careful in terms of the air leaks. That’s not the hypothesis. The hypothesis is I can build a house without, that doesn’t need a furnace, at a price point that’s similar to a regular home. That’s the hypothesis. And the technical [sic: technological] uncertainty is the cost. [underlining added] 

[27] Thus the Appellant’s position is not that there was any technological issue vis-à-vis the various aspects of construction referred to in CS’s testimony in constructing this energy efficient home. And I would agree with that. None of these various aspects, including extra insulation of the footings and foundation, walls and attic, extra taping of gaps and seams, and as well development of the modified ground loop as a cheaper and less energy efficient geothermal system, were described by CS as reflecting new technological knowledge. That is, none of these various aspects that CS testified to reflected development of technological knowledge new to the home construction industry. 

[28] Furthermore the Appellant presented no expert evidence as to the state of technological knowledge within this industry, that might suggest that the Appellant had broken new technological ground in constructing this energy efficient house. No supposedly new knowledge was identified by CS, let alone by an expert witness, as having been sought or developed in the construction of this house. 

[29] The Appellant’s position however is that keeping the construction cost, of a house so energy efficient it does not require a furnace, to a level equating with the construction cost of a house built to regular code standards is itself a technological advance.

[30] I disagree. Conceptually there is no technological aspect implicit in the notion of an item costing or priced at ‘x’ rather than ‘y’ dollars. Of course one might envisage that the cost (or price) of an item could be reduced in the event of some particular technological advancement. But the relevant question for SR&ED purposes would remain – what is that contemplated technological advancement itself, that could lead to the achieving the commercial objective of lowered pricing, comparable to that of standard code constructed housing. 

[32] Also I note we heard no organized and specific comparison costs evidence regarding either construction or operating costs post-construction as compared to standard houses. The fact that electricity bills were somewhat equivalent to another house is insufficient. This again is where neutral expert evidence would or could have assisted. 

[33] Conceivably, uniquely combining several known procedures that result in rendering a process more efficient might constitute SR&ED. However, that would only be so if the unique combination is itself accomplished through application of the scientific method contemplated by Northwest Hydraulic. Merely combining known procedures characteristic of sustainable housing in what may have been a unique way (although if so, that was not made clear) does not without more constitute SR&ED. Again, certainly expert evidence, not adduced in this appeal, would be desired to identify that new technological knowledge had resulted. 

[34] The third of the five identified steps is, “did the procedure adopted accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses?” What slight evidence of testing there was in this matter, basically being the tested three different percentages of recycled material in the concrete mix, struck me as entirely being routine engineering, and not based on any identified hypotheses. Trial and error seem to be the basis for this testing. 

[35] The fourth of the five Northwest Hydraulic tests is, “did the process result in a technological advancement?” This has basically been answered above, in the negative. Of course technological advancement includes new knowledge that results even from a failed attempt to achieve a technological advance. We have no evidence here of new knowledge of a technological nature. 

[36] The fifth of the five Northwest Hydraulic tests is, “was a detailed record of the hypotheses tested, and results kept as the work progressed?” I do not consider that any scientific methodology testing was done in this matter. In any event there was no detailed compilation of hypotheses testing results, kept as the work progressed. 

[37] In conclusion, while the work done by the Appellant is admirable, it was not reflective of SR&ED. Accordingly the appeal will be dismissed. The two appealed loss determinations made September 23, 2015 will be upheld. 

Link to Full Ruling 

View the full report here.

Related Ruling

N/A