SR&ED Knowledge and News

SR&ED Program Updates: April-June 2019

This post outlines the updates to the program from April to June 2019, including administrative, policy, tax law, and court cases. We have identified some key trends to watch in the SR&ED environment.

Administrative, Policy, and Legislative

After the budget was released in the first part of 2019, the CRA remained relatively quiet in relation to SR&ED in the second calendar quarter of 2019. 

The “What’s New – SR&ED Program” website summarized the budget 2019 changes stating:

The Department of Finance announced in the March 19, 2019, Federal Budget that for tax years ending after March 18, 2019, the use of the previous year taxable income is removed as a factor in determining a Canadian-controlled private corporation’s $3 million annual expenditure limit for the purpose of the refundable enhanced SR&ED investment tax credit (35%). 1

An update to the SR&ED Investment Tax Credit Policy has also been promised, but was not implemented in this calendar quarter. 

Judicial Proceedings

The second quarter of the year was as busy as the first quarter in terms of judicial rulings. Another six appeals were heard before the courts, two were allowed, three were dismissed and one is a special case requiring additional proceedings.  Basic facts are listed along with links to summaries below.  When the additional summaries become available we will provide short excerpts here, as well as an analysis of key themes stemming from the latest rulings following the appeals process.

Deans Knight Income Corporation v. The Queen

The Appellant in this case deducted “accumulated and unclaimed non-capital losses, scientific research and experimental development expenditures (“SRED”) and investment tax credits (“ITCs”) (together the “Tax Attributes”) subsequent to a series of transactions carried out in 2008 and 2009.”  The Appellant moved their assets and liabilities to a new corporation then used their shell to fund a new business whose profits would be sheltered by the Tax Attributes.  This practice is referred to as a “recapitalization and restart transaction”.  Matco Capital arranged the transaction for the Appellant, as well as, made a significant investment with the intention it would make a profit.  The Respondent argued that the Appellant committed abusive tax avoidance through this transaction.  The judge ruled that the Appellant did not commit abusive tax avoidance “The use of the Appellant’s Tax Attributes against income from the investment business could have been achieved even if the Investment Agreement had not been entered into.” The appeal was allowed.

Read the detailed summary on Deans Knight Income Corporation v. The Queen.

ExxonMobil Canada Ltd. v. The Queen 

The Appellant submitted that the cost of drilling of the B16-54 well in 2005 qualified as an SR&ED expenditure because of “an exploration licence granted by the Canada-Newfoundland Offshore Petroleum Board”.  The Respondent argued that the drilling of the well was to gather data on the oilfield in the Hibernia southern extension and to satisfy EL1093, an exploration licence granted by the Canada-Newfoundland Offshore Petroleum Board.  The judge ruled that “common sense and commercial reality” dictated the drilling of the well and not SR&ED; the validation of the RCA method was incidental.  Additionally, the judge stated the in the definition provided in the Income Tax Act explicitly excludes drilling for petroleum from being eligible for SR&ED investment tax credits.  The judge said “However, paragraph (h) of the definition of SR&ED excludes any “work with respect to . . . prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas”. The judge dismissed the Appellants appeal in regards to their SR&ED claim.

The Appellant also appealed the reassessment to reclassify $530,138 of its revenue from the sale of crude oil during its 2005 taxation year as not qualifying for the resource allowance.  The judge assessed that the Appellant used this loading system for safety and environmental reasons, the crude oil from the platform could not be put directly into storage tankers; and was directly related to the production and sale of the oil.  The judge ruled that the loading system did not generate income or loss for the Appellant and that income received was based on the market value of the crude alone.  The appeal in regards to the resource allowance was allowed.

For the full ruling of Exxonmobil Canada Ltd. v The Queen visit our legal rulings page

Total Energy Services Inc. v. The Queen 

The Appellant, Total Energy Services Inc. (“TESI”) is a body corporate and is the ultimate successor of the conversion of the Total Energy Services Trust from a trust to a corporation, which occurred on May 20, 2009.  The conversion was required due to the October 31, 2006, announcement by the Minister of Finance of a new distribution tax for specified investment flow-through trusts (“SIFTs”).  Legislation was later implemented to allow conversions of a SIFT on a tax-deferred basis to a corporation (the “SIFT Conversion Rules”).  The Appellant used certain tax attributes (relating to capital and non-capital losses, ITCs and SR&ED expenditures of Xillix) in its December 31, 2010, and December 31, 2011 taxation years which were denied by the CRA in 2015 on the basis of the general anti-avoidance rule (GAAR).  The judge ruled that the documents requested by the Appellant in their appeal were not relevant to their case and the Respondent was not required to share them with the Appellant.  The appeal was dismissed with costs.

You can read the full ruling from Total Energy Services Inc. v. The Queen on our legal rulings page.

Gordon v. Canada 

Allan Jay Gordon, James A. Deacur and Associates Ltd. [JAD] and James Allan Deacur sought damages against the Government of Canada based on tortious conduct arising from a CRA investigation that occurred in 1995. JAD is a consulting firm specializing in helping their clients submit SR&ED ITC claims.  Initially, charges involving 140 SR&ED ITC claims submitted on behalf of their clients were under review, it was later reduced to 31.  The investigation resulted in the prosecution of Mr. Gordon and Mr. Deacur on five counts of fraud, attempted fraud, and possession of the proceeds of crime.  While the preliminary hearings were lengthy the prosecution ended when the Crown counsel entered a stay of proceedings.  Mr. Gordon and Mr. Deacur assert “several causes of action including negligent investigation, breach of Charter rights, misfeasance in public office, malicious prosecution and intentional interference with contractual relations.”

The investigation conducted by the CRA uncovered that JAD was backdating records to support transactions that never actually took place. Additionally, JAD would set up non-arm’s length companies to create a paper trail of a sub-contracting relationship in order to submit their SR&ED ITC claim for a higher refund value.  Mr. Gordon and Mr. Deacur believed that because their scheme had not been uncovered and many claims went through the CRA was allowing their deceit.  During this trial, it was revealed that the CRA could not always prove that the documents were falsified; therefore, those claims with sufficient documentation and meeting the criteria set forth in the ITA were allowed.  This did not mean the CRA condoned the actions of JAD.  The judge ruled that the investigation by the CRA was thorough, fair, objective, and competently executed.  The case was dismissed.

You can read the full ruling from Gordon v. Canada (2019) on our legal rulings page.

Accurso v. the Queen  

In 2008, the RCMP executed an investigation into the possible fraud, bribery, and breach of trust involving employees of the CRA named “Project Coche”.  The investigation led to multiple criminal charges.  In this ruling, the Applicants were subject to an audit by the CRA and criminal charges by the RCMP.  Some of the charges against the Applicants include eluding payment of taxes, bribing CRA officials, fraud, fraudulent SR&ED investment tax credit applications, forgery, breach of trust, and conspiracy. The Applicants brought forth many allegations: issues of a Jarvis breach (fiscal audit vs penal investigation); sought the exclusion of evidence following several searches; request the excision of certain sections of the Information to Obtain (ITO) allegedly containing falsehoods and misrepresentations; and inappropriate and unlawful behaviour by the authorities.  

Background: In 2006, the CRA received an anonymous tip about the corruption of CRA employees but the tip was insufficient for a criminal investigation.  The judge ruled that “the fact that internal investigations were ongoing during the time of the audit does not alter the nature of the auditors’ inquiry”  and there were no issues of a Jarvis breach.  The judge also stated that the actions of the CRA investigators were consistent with an audit, not a criminal investigation.  The Court did not find “evidence of collaboration or delegation of responsibility between the auditors and the investigators which would indicate that the predominant purpose of the audit was criminal liability.”  While the investigators were aware of suspected corruption in the CRA, the judge ruled that the CRA employees who conducted the audit did not do so to gather evidence for a criminal trial. The Court also found that the evidence found in searches was done so legally and would not be thrown out.  In regards to the ITO, the judge stated: “The Applicants have not established that Faribault knew or should have known that information in his ITO was false, inaccurate or misleading, nor have they established omissions in his obligation to make full, frank and fair disclosure.”  

Additionally, the Applicant claimed that the Respondent illegally shared their confidential information with the RCMP.  Section 241 of the Income Tax Act contains a general prohibition of sharing of taxpayer information but it also includes a long list of exceptions.  The Court found that exception found in subsection 241(4)a) of the ITA was applied as necessary for the administration and enforcement of the ITA.

(4) An official may

(a) provide to any person taxpayer information that can reasonably be regarded as necessary for the purposes of the administration or enforcement of this Act, the Canada Pension Plan, the Unemployment Insurance Act or the Employment Insurance Act, solely for that purpose;

The judge ruled that the sharing of information with RCMP was permitted by subsection 241(4)(a).

The judge also ruled that the conduct of the authorities was not unlawful or inappropriate.  The case was dismissed.

You can read the full ruling from Accurso. v. The Queen on our legal rulings page.

SREDucation Articles

During April – June we focused on answering some of the more common questions we typically hear from our readers. In doing this we hope to offer potential claimants a greater understanding of the SR&ED process.

What are the fields of science or technology covered by SR&ED (Line 206 of the T661)

An SR&ED application can be submitted for research in fields of science and technology but which ones? The CRA has supplied a handy list in Appendix 1 of the T4088 guide, which is used to fill out the field line  206 of the T661 form. Broadly speaking, the two main fields are Natural Sciences and Engineering. Take a look – you might be surprised at what is included!

Can you apply for the SR&ED credit past the filing deadline?

Actually you CAN apply for the SR&ED tax credit past the filing deadline, but you will not be successful. There are two specific examples of previous cases in which the applicants lost their appeals due to late submissions. It is always best to file sooner rather than later; however, if you are close to your deadline it doesn’t hurt to take a picture of the postmark on your claim or keep a receipt with package tracking information as evidence of submission dates.

Summary of SR&ED Program Updates

SR&ED in the second calendar quarter of 2019 has interesting rulings, but no real upsets or major news to report in relation to administration or policy. The CRA is maintaining the status quo after shaking things up for small and medium CCPCs in the first quarter. We continued our educational mandate by writing informative blog posts to help our clients with their questions. We also continue our judicial summaries to illustrate what can happen during the appeals process.

Share your thoughts on the recent SR&ED program updates by commenting below, or adding to the conversation in our LinkedIn group, Facebook page or via Twitter.
Or even better, sign up for the Comprehensive Guide to SR&ED

Note: The Legal Rulings Database is available to SR&ED Education and Resources Master Members. 

Show 1 footnote

  1. “Investing in the Middle Class.” Government of Canada, https://www.budget.gc.ca/2019/home-accueil-en.html. Accessed 22 September 2019.

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