On October 5, 2020, the Court of Quebec delivered a ruling on a Scientific Research and Experimental Development (SR&ED) investment tax credit (ITC) appeal. In the case of MDA Systems Ltd. c. Agence du Revenu du Quebec (2020), Justice Daniel Bourgeois ruled in favour of MDA and dismissed the Appeal, stating that the work the MDA carried out was SR&ED eligible work that was performed on behalf of the Government of Canada.
This article will take a closer look at this case to provide the following:
- An overview of the case against MDA Systems Ltd. (“Appellant”)
- Key arguments & lessons learned from Justice Bourgeois’ ruling
MDA Systems Ltd. c. Agence du Revenu du Quebec: An Overview
The Appellant, MDA, is a corporation based out of Vancouver, British Colombia that operates in the computer system engineering industry. During the taxation years in dispute, MDA was part of a corporate group whose parent company was MacDonald, Dettwiler and Associates Ltd who had offices in Richmond, British Columbia; Montreal, Quebec; and Brampton, Ontario. The work in dispute was done in Quebec. MDA entered into several contracts with the Canadian Space Agency (CSA), through Public Works and Government Services Canada (PWGSC), for the RADARSAT Constellation Mission program (RCM Program). The contract totalled over $1B. During the taxation years in question, 2009, 2010, 2011, 2012, 2013, & 2014, MDA filed scientific research and experimental development (SR&ED) expenditures and claimed the Quebec tax credit for salaries and wages (QLTC). During an audit Revenue Quebec determined that MDA received contract payments from the Government of Canada. The judge used the Assistance and Contracts Payments Policy to determine if these payments are classified as contract payments in regards to SR&ED.
The judge ruled that the Government of Canada bore the risks of the RCM program. MDA argued that it owned the intellectual property which indicates that there was not a contract payment. The judge used the Assistance and Contracts payments policy to determine:
 Essentially, during the RCM Program, the intellectual property developed by MDA in the space component of this project was transferred from MDA to the Government of Canada.  The Government of Canada did not feel it necessary to obtain the intellectual property developed for the ground segment of the RCM Program because it was a pre-existing intellectual property that already belonged to MDA.  The testimony of Tremblay and of Makim establishes that the Government of Canada would be allowed to build additional satellites or to have additional satellites built in the future.  Therefore, the Government of Canada had to be able to use the intellectual property it owned that had been developed during the RCM Program.  Last, and in light of the foregoing, the analysis of the contract terms tends to show that ultimately the RS&ED work was undertaken on behalf of the Government of Canada1
Additionally, the judge ruled that the contract between MDA and the Government of Canada was not a contract for the sale of goods; it was a contract for the delivery of the RCM program which included SR&ED eligible work. Finally, the judge ruled that “the evidence presented at trial leads the Court to conclude that MDA received ‘contract payments’ within the meaning of this expression in s. 1029.8.17(c)(ii) of the Taxation Act” with costs in favour of the defendant.
Justice Bourgeois’ Ruling: Key Arguments & Lessons Learned Regarding Contract Payments and SR&ED
The key takeaway that stood out regarding SR&ED claims during these legal proceedings pertains to:
Contract Payments: The Appellant claimed the Quebec tax credit for salaries and wages (QLTC) but Revenue Quebec determined that the appellant received contract payments from the government of Canada. Justice Bourgeois had to determine whether or not the Appellant was eligible to claim the Investment Tax Credits (ITC’s) related to the project. By analyzing all of the circumstances relating to the payment and using the Assistance and Contract Payments Policy, the judge ruled that the contract between MDA and the Government of Canada was not a contract for the sale of goods; it was a contract for the delivery of the RCM program which included SR&ED eligible work. This distinction is important as it allowed the taxpayer to claim SR&ED work done within contracts but one must ensure that only one taxpayer or corporation is claiming SR&ED, as it cannot be claimed by more than one entity.
When assessing government involvement in SR&ED payments, contractual arrangements are closely scrutinized by the reviewer. To ensure any contract payments and government assistance are correctly claimed on your SR&ED application be sure to regularly review the most recent CRA Assistance and Contract Payments Policy. We will do our best to keep our readers up to date on any policy changes or amendments.