Mold Leaders Inc. v. The King (2023)

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Mold Leaders Inc. v. The King (2023)

Key Lessons / Points
  • To be eligible for the SR&ED tax credit, work performed must address a scientific or technological uncertainty with the goal of increasing your company’s knowledge base relative to its state before the project and above the overall industry’s knowledge base through scientific or technological advancement.
    • A project must meet all the criteria laid out in the “five questions” to be eligible for SR&ED.
    • The Appellant was unable to prove they had identified a technological uncertainty and sought to reduce or eliminate that uncertainty through experimentation or analysis in all of their projects.
  • It is preferable to keep marketing components separate from research in supporting documentation, to ensure the research (not commercial) purpose is clear. For more information on market-driven development work, see the SR&ED While Developing an Asset Policy.
    • Using existing manufacturing processes in an attempt to build a better product is not SR&ED.
  • Providing an expert in the field of SR&ED conducted can be crucial for projects to be seen as SR&ED versus routine engineering.
    • In this case, “the individual did not have sufficient background in the plastic injection molding industry to be qualified as an expert in that industry. Accordingly, he was not accepted as an expert and his expert report was not admitted into evidence.”
Fiscal Years in Question

2016, 2017

Court Heard In

Tax Court of Canada (Ottawa, Ontario)

Dates Heard

July 7, 2022

Length of Process

6 years

Neutral Citation

2023 TCC 127



Amount Under Dispute

F2016 ($17,618), F2017 ($70,868)


[68] The appeal will be dismissed, with costs. ML did not establish that four of the five requirements for establishing SRED for each of the eight projects were met.


The Appellant, Mold Leaders Inc. (ML), conducted a business of injection molding, computer numerically controlled machining and prototype injection molding for clientele including from the automotive industry. In this case, the Appellant sought to appeal the reassessments of their 2016 and 2017 taxation years made by the Minister of National Revenue (the “Minister”). The Minister concluded that “the Appellant did not identify or encounter any technological uncertainty which could not be removed by the Appellant’s knowledge base”, and therefore denied the Appellant a deduction of $44,356 claimed as scientific research and experimental development (“SR&ED”) expenditures in the 2016 tax year and $156,524 claimed as SR&ED expenditures in the 2017 tax year, as well as the corresponding investment tax credits (“ITC”) of $17,618 and $70,868 respectively.

To begin the Judge reviewed the initial testimony of the Appellant’s primary witness, Mr. David Duong, for evidence of technological uncertainties. The Judge then used the definition of SR&ED as written in the Income Tax Act, and the five-factor test first posed by Judge Bowman within the case of Northwest Hydraulic Consultants Ltd. vs. The Queen (1998), to determine if the Appellant’s research activities met the definition of SR&ED activities and that the expenses it incurred were deductible expenses for SR&ED and therefore eligible expenses for the calculation of the ITC.

The Appellant had retained the company National R&D Inc. as an expert witness for their case, however, because the individual from National R&D Inc. “did not have sufficient background in the plastic injection molding industry to be qualified as an expert in that industry”, he was not accepted as an expert and his expert report was not admitted into evidence. The Judge determined the Appellant’s process was “indicative of routine engineering or standard procedures”.

The Judge determined that there was no technological or scientific uncertainty within any of the eight projects. As the Appellant did not meet its burden of proof and did not demonstrate, on a balance of probabilities, that there was technological uncertainty or that its activities constituted SR&ED activities, there was no need to review the question of eligible expenses and the appeal was dismissed without costs.

Key Excerpts

[1] The appellant, Mold Leaders Inc. (ML), has appealed the reassessment of its 2016 taxation year and the assessment of its 2017 taxation year, both raised November 1, 2018, under the federal Income Tax Act (Act). The appealed assessment and reassessment each disallowed claims for scientific research and educational development (SRED) expenditures and corresponding investment tax credits (ITCs) provided for by the Act.

[2] ML, located in Georgetown, Ontario, at all material times, conducted a business of injection molding, computer numerical controlled machining and prototype injection molding for clientele including from the automotive industry. This work included research, design and development of new or improved molds.

[3] In 2016 and 2017, ML engaged in over 300 work assignments, including eight for which it filed SRED claims. For the 2016 taxation year, SRED expenditures of $44,356 and refundable ITCs of $17,618 were claimed. For the 2017 taxation year, ML claimed SRED expenditures of $156,524 and refundable ITCs of $70,868.

[5] The issue in respect of each of the eight projects is whether the SRED claim is valid.

[9] Mr. David Duong was the primary witness for the appellant, ML. He is ML’s owner and president. I found him knowledgeable and credible. He testified in English – his fourth language. Following high school, he graduated from a two‑year mechanical technician program at Humber College in Toronto. He there learned CAD/CAM design and CNC machining.

[13] Importantly, Mr. Duong, testifying for ML, was the only witness with first‑hand knowledge of the eight subject projects.

[15] Project 1: This project commenced with a 2016 contract ML had with a customer, Dynaplas, for ML to design and make a 4-cavity mold for the production of a particular valve for use in anti-lock braking systems in the automotive industry.

[16] The mold was to open and eject the part once solidified. Initially, H13 steel was used for making the mold. The part was plastic but hardened with 30 percent glass, which made the plastic harder than ML was used to. The first mold made with H13 steel was not acceptable. The customer’s testing of the mold revealed that it misaligned after a short period. After further work ML and Dynaplas agreed that W360 steel be used, having a higher hardness rating than H13 steel. ML did not itself have experience with W360 steel. ML obtained the W360 steel from a European company.

[17] ML had to learn to work with W360 steel, with which it was unfamiliar. W360 steel was harder to cut and grind, i.e. mill. Ultimately, eight versions of the mold were tested by the customer (not ML) and sent back to ML six times with comments for improvement. Ultimately, a mold was accepted.

[19] In answering what was achieved, Mr. Duong did not identify a technological advance. Of note also is ML counsel’s reference to the ML work as, “all this trial and error”.

[20] Project 2: the second project was also with Dynaplas as a customer. The customer sought from ML the making of a mold for brackets, right and left, each five inches long with a cavity, for installation of a camera at the front of a vehicle. Dynaplas provided drawings and specifications relevant to the project. ML made such molds and delivered them to Dynaplas for testing by the customer. Dynaplas found that the design of the bracket parts created a problem with ejection of the freshly molded brackets from the mold. The mold was altered and sent back and forth six times for testing by Dynaplas. Ultimately, the last version was found acceptable.[2]

[21] Mr. Duong was asked by ML’s lawyer:

Q: …so I’m just going to ask you, so what did you achieve? What did you advance in this project?

[22] Mr. Duong’s answer referenced further learning of ML in molding with new equipment, but not any attempted or actual technological advancement.

[23] Project 3: the third project was again from Dynaplas as a customer – to make a mold for injection molding of a fuel cap sensor – i.e., a housing cover, three inches in diameter, for an automotive sensor. Again, Dynaplas provided drawings and specifications. The mold that ML fabricated was sent to Dynaplast for testing at Dynaplast’s facility. It was returned, with Dynaplast’s comments including the need for the mold to better accommodate the flatness of the file cap sensor, to a tolerance of one one-thousandth of an inch. Because of the 30% graphite component of the plastic resin part, the part was sticky in being released from the mold, resulting in warping.

[24] ML chose to add further “gates” to the mold, allowing three sites rather than one for injection of component materials into the mold, as a way to solve the sticking and warping. This approach is called “mapping”, to compensate for warping by select placement of first one then two additional gates. With added gates, several further molds were sent by ML and tested by Dynaplast (four times), with ultimately Dynaplast expressing acceptance. The number of gates (three) was acceptable because of the unique shape of the part, achieving the required flatness (non-warping).

[27] Again, there is no apparent technological uncertainty as opposed to ML itself developing its knowledge or expertise, including in working with high graphite content resin.

[28] Project 4: a customer, Intropac International, was having difficulty with a 16-cavity mold for injection molding of a deodorant barrel or canister, 4 inches in length. Intropac provided drawings and specifications. The mold was designed to be filled with deodorant product from the bottom rather than the top. Each of the 16 cavities had a steel core for coring the inside of the barrel being molded and filled with product to be cooled. The mold was sent back due to cracking of the cores’ thin wall passage of cooling water, which stress led to leakage into the product. First, ML changed the type of steel to H13 steel. Also, it increased the wall thickness of the water passage by a millimetre. Ultimately, ML utilized push rods which were successful in ejecting the part from the mold without damage over time to other components.

[32] Again, there appears to be no indication or identification of a technological advance for the international mold making industry, as opposed to adding to ML’s own knowledge and abilities.

[33] Project 5: Dynaplas as a customer sought the making of a 2-cavity mold for plastic injection molding of a 5-inch tube, identified as an IEM port, for the auto industry. A mold was made from drawings and specifications provided by the customer. The part to be molded was made of resin mixed 40% with graphite. It had a 2 mm. slot with a 38 mm. depth. The ML mold was sent to the customer for testing and sent back to ML with comments for improvement. The problem particularly was machining tool that ML acquired for this job. ML did not have much experience with the machines and technique for doing this job, and achieving the required tolerance of 0.005 mm. in respect of the said slot.

[34] The different issues encountered included that cutters (a type of tool) being used were breaking. ML learned from the internet how best to use them, in “playing with” the tool’s parameters.

[36] Again, it seems the focus was on what ML learned as opposed to any achievement of a technological advance for the industry generally.

[37] Project 6: the sixth project was a 2017 order from Intrapac for the making of a 24‑cavity mold for injection molding a backing plate intended for casing of a solid antiperspirant. The flatness of the plate presented a challenge, in the machining of the mold. The test sample of the mold, with one cavity, went several times to the customer for testing. Ultimately, the customer was satisfied. Then a 24-cavity mold was prepared.

[39] Again, there is no indication from Mr. Duong that any technological advance of industry-wide proportions was achieved, rather than simply the advance of ML’s own learning curve.

[40] Project 7: the seventh project was an order from customer Delmo Molds (another mold maker) for the fabrication of a 4-cavity mold for plastic injection for the molding of a cap for a coffee bottle top with a 3-inch diameter. The cap to seal the bottle includes a ring that encircles the bottleneck, thus termed a “flip top” cap or lid. ML produced a mold. After testing by the customer, the mold was returned with feedback. The cap’s hinge, a thin plastic strip connecting to the encircling ring, presented difficulty at the molding stage. The comparative masses of the lid and the sealing ring result in differing rates of shrinkage at the molding stage, causing misalignment of the two ends linked by the thin plastic hinge.

[43] The evidence in chief was indicative of further adjustments including as to length to achieve a workable solution. The project did not end with success.

[45] He acknowledged that this hinge case was, “different than the typical one.” He added, “the thickness of the hinge was really the main issue”.[15]

[46] None of this was identified as a technological uncertainty or risk, nor suggestive of a technological advance for the industry, as opposed to a further step up ML’s own ladder of experience.

[47] Project 8: the eighth project was the fulfillment of an order by customer Centennial Plastic for the machining of a two-cavity core plate for use in the molding of a cylindrical auto part. The plate required an O-ring seal, free from flashing, with two-degree mirrored pockets and a tolerance of 0.0002 inches. The core plate (or “mold shoe”) is a surface for assembly of all mold components that slide in and out in making the molded part. ML previously had done work on core plates. Here, components on the mold plate had to tilt so that the newly molded part would release from the mold.

[48] The mold material itself was SS4140 stainless steel which is very hard. The part to be molded was complicated and the core mold designed and made by ML weighed 400 pounds. The required tolerance was hard to achieve – vibration being an issue, although training was provided by ML’s supplier of a new 5-axis machine used for machining the core plate.

[51] There appears to be no indication or identification of a technological advance here either, but rather an advance in ML’s experience and knowledge.

[53] National R&D was retained to assist ML in claiming SRED. ML had not carried out any of the eight subject projects with the intention of claiming SRED for them. National R&D assisted ML in picking these eight projects, from a review of the over 300 projects ML had carried out during 2016 and 2017, for the filing of the herein SRED claims. National R&D was much involved in preparing these SRED claims for submission to the Minister. The Minister audited these claims and denied them all. ML again with National R&D assistance consequently served notices of objection and thereafter commenced this appeal without waiting for the CRA’s Appeals Division to address the notices of objection.

[54] I note also that as its first witness in this matter ML called an individual seeking his acceptance as an expert witness knowledgeable of the plastic injection molding industry. A voir dire was conducted on the first day of the hearing into whether he could be accepted as an expert. I rendered an oral decision finding based on the voir dire that the individual did not have sufficient background in the plastic injection molding industry to be qualified as an expert in that industry. Accordingly, he was not accepted as an expert and his expert report was not admitted into evidence.

[56] The technological uncertainty pertains to the relevant industry, rather than a single participant in that industry. The uncertainty has to be with respect to the advancement of knowledge of the industry generally (here the mold making industry) rather than with respect to the knowledge of a single participant in that industry.

[59] Here there was not evidence as to the overall industry state of knowledge in the context of any of the eight projects.

[60] It is pleaded at para. 24(kkkk) in the Respondent’s Reply that the Minister assumed in raising the appealed assessment and reassessment that, “the Appellant did not identify or encounter any technological uncertainty which could not be removed by the Appellant’s knowledge base”. This assumption was not disproven. The fact that no evidence was called as to the state of knowledge in the mold making industry generally made it difficult to know if and when a “challenge” for ML did or did not constitute a technological risk or uncertainty.

[61] The above extracts from Mr. Duong’s testimony for the eight projects generally reflect that ML’s success or advancement as to those projects involved a routine engineering and standard practices approach, using methodology familiar to ML. When he was asked by ML’s counsel for each project what had been achieved or learned, the answers did not reveal or identify technological uncertainties being addressed in a scientific manner. This is not compatible with technological risk or uncertainty intended in an SR&ED context. Routine engineering and standard practices includes a trial and error approach, although not a scientific approach of forming and testing hypotheses.

[62] The second of five SRED requirements is whether the SRED claimant formulated hypotheses specifically aimed at reducing or eliminating any technological unknowns. At para. 24(mmmm) of the Reply it is pleaded that the Minister assumed that “the Appellant did not formulate or attempt to formulate a hypothesis”. No ML hypotheses of ML were specifically identified by Mr. Duong – the only witness who had personal knowledge of the work that went into the respective projects. This observation is not intended to at all denigrate ML, which the evidence showed as being a respected and successful mold-making entity.

[63] The third of the five SRED requirements is, did the procedures adopted accord with established and objective principles of scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?

[65] The answer here is in the negative. ML’s favoured approach, as I understood from Mr. Duong’s testimony, was to basically try various options, anticipating that one likely would work. For me, that is indicative of routine engineering or standard procedures. The term “trial and error” was used by ML’s counsel regarding Project 1 (noted above), in the course of questioning Mr. Duong in reference to actions of ML. There were several references by Mr. Duong in the course of his testimony regarding bringing his team together for a discussion as to next steps, but that itself is not inconsistent with routine engineering or standard procedures, as distinguished from systematic investigation or testing of hypotheses.

[66] The fourth requirement is that the processes have resulted in a technological advance. This requirement also was not met, as previously discussed, because no technological risks or uncertainties were identified in evidence in the first place that could not be removed by ML’s knowledge base. This is as per the ministerial assumption at para. 24(kkkk) of the Reply, noted in para. 60 herein. The fact that we heard no evidence as to the state or nature of the mold maker industry generally, also contributed to this conclusion.

[67] The final requirement is that a detailed record of the hypotheses, tests and results be kept, as the work progresses. This is a less rigorously enforced requirement. I accept that ML kept computerized records of each step in its work and so I would conclude that ML did meet this requirement.

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