SR&ED Program Updates: April-June 2022

SR&ED Program Updates: April-June 2022

What happened with SR&ED in the second quarter (April to June) in 2022? Here, we discuss the updates.

This post outlines Scientific Research and Experimental Development (SR&ED) program updates from April-June 2022, including administrative, policy, tax law, and court cases. SR&ED Education and Resources was busy in the second quarter of 2022 keeping our readers up to date, including summarizing eight legal rulings on the subject of SR&ED, examining both the federal and Ontario provincial 2022 budgets, and examining some of the Canada Revenue Agency’s (CRA) key SR&ED policies to help expand our readers understanding of the SR&ED program.

SR&ED Policy and Program Updates

On April 28, 2022, the CRA released policy changes for three SR&ED policies including the Prescribed Proxy Amount Policy, the SR&ED Claims for Partnerships Policy, and the SR&ED Investment Tax Credit Policy. The CRA has removed discussions concerning capital expenditures, the basic investment tax credit rate of 20%, and the previous PPA rates of 60% and 65% as these no longer apply. They have also adjusted the wording of various sections.

The CRA posts any changes and updates within the SR&ED program by order of date to the What’s new – SR&ED Program page. This page is an important source of information for SR&ED taxpayers.

SR&ED Education and Resources Articles

SR&ED Education and Resources was busy in the second quarter of 2022 educating our readers on a variety of SR&ED topics, and taking a closer look at two of the Canada Revenue Agency’s (CRA) SR&ED policies in the hopes of further illuminating the world of SR&ED.

  • On April 13, 2022, We looked at the importance of detailed time tracking for SR&ED projects and reviewed a few specific time tracking software applications that may be effective in an SR&ED environment in Time Tracking Software Applications for SR&ED in 2022.
  • On April 26, 2022, we analyzed the lessons learned from the ruling of R.c. Comparelli (2020), including what the roles and responsibilities of the financial reviewer are within the SR&ED program, and how going beyond those may be considered fraudulent, in R. c. Comparelli: The Role of the Financial Reviewer in SR&ED.
  • On May 12, 2022, we discussed the concept of advancement within the SR&ED program and how crucial the presence and of advancement is within your SR&ED project(s) in Technological Advancement: The Core of SR&ED.
  • On May 24, 2022, we discussed how the SR&ED refund is calculated at the federal level and if there is a maximum amount a claimant may receive per year in Maximum SR&ED refund: Federal level.
  • On June 7, 2022, we examined the CRA’s SR&ED Salary or Wages Policy for our readers. We discussed how and when employee salaries and wages constitute as SR&ED eligible expenditures as per the policy, and how to apply these expenditures to maximize their tax returns in CRA Policy Review – SR&ED Salary or Wages.
  • On June 21, 2022, we examined the CRA’s SR&ED During Production Runs Policy. We analyzed the variety of costs which may be incurred during production runs, how and when those expenditures may constitute as SR&ED eligible expenditures, and how to apply them to maximize your tax returns in CRA Policy Review: SR&ED During Production Runs.

SR&ED in the News

On April 5, 2022, the Alberta Wheat Commission announced that Alberta wheat growers who did not request a refund of their check-off fees qualify for an SR&ED tax credit for the 2021 tax year at a rate of 31%. We detailed this announcement and how check-off or levy fees can be applied within the SR&ED program in 2021 SR&ED Tax Credits for Alberta Wheat Farmers.

T661 Guidance

We did not publish any articles regarding the T661 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim Form from April-June 2022. Keep an eye on our posts as we enter the next quarter of 2022. We will continue to delve into topics of interest and demystify the SR&ED application process for prospective claimants.

      Administrative, Policy, and Legislative

      In the second quarter of 2022 we published three articles in regards to SR&ED news and information updates from CRA:

      Judicial Proceedings

      The second quarter of 2022 was busy with regard to judicial proceedings. We analyzed eight SR&ED court rulings for our readers.

      Bresse Syndics Inc. v. Canada (2021)

      Topic: Financial Eligibility – specifically, CCPC status

      In this case, an appeal was filed by Bresse Syndics Inc., the Appellant, acting for the bankruptcy of CO2 Solution Technologies Inc. who transferred its SR&ED activities to the Appellant after a decision the Tax Court of Canada made in 2019. The first appeal related to the SR&ED claim in question was decided upon in 2019. This case was the second attempt to appeal the assessment issued on December 31, 2012, in which the Minister of National Revenue disallowed the credits claimed on the ground that the Appellant did not qualify as a CCPC for the taxation year in issue, as it was directly or indirectly controlled by the public corporation, Public CO2. 

      In this case, the judge reviewed the deed that created Fiducie as the Appellant’s sole shareholder and determined that the mechanism set out in the document was sufficient to establish that Public CO2 exercised de jure control over the Appellant. The judge then explained the concept of de facto control and concluded that Public CO2 also had de facto control over the Appellant as Fiducie’s deed of trust is a legally-enforceable arrangement giving it the clear right and ability to . . . influence in a very direct way its sole shareholder. The judge, therefore, concluded that Public CO2 did in fact exercise de jure and de facto control over the Appellant during the taxation year of 2009, and the decision issued on December 31, 2012, stating the Appellant corporation did not hold CCPC status during the year in issue was correct. The appeal was dismissed.

      For more details and analysis, please view our complete analysis of Bresse Syndics Inc. v. Canada (2021).

      Kam-Press Metal Products Ltd. v. Canada (2021)

      Topic: Technical Eligibility – specifically, Scientific Method & Use of Five Questions

      In this case, the Appellant, Kam-Press Metal Products Ltd. (Kam-Press), appealed the reassessments of their 2009 and 2010 taxation years including the scientific research and experimental development (SR&ED) expenditures and the investment tax credits that were claimed for each tax year respectively. The initial appeal was decided on October 30, 2019. This case was the Appellant’s second attempt to overturn the decision. 

      In the first appeal, the judge used the case of Northwest Hydraulic Consultants Ltd v. The Queen (1998) to determine whether the Appellant’s activities did constitute as SR&ED. In this case, the judge noted that in the first appeal the judge determined the third criteria from Northwest Hydraulics was missing:

      3. Did the procedures adopted accord with established and objective principles of the scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing, and modification of hypotheses?

      The Appellant argued that since there was no reference in the text of the definition of SR&ED to the third criteria as set out in Northwest Hydraulics, it should not have been applied by the Tax Court Judge to determine the outcome of the case.

      In response, the judge noted that the role of the court is not to recite the words used but to interpret the words of the Act or the Regulations based on textual, contextual, and purposive analysis and that within the case of Northwest Hydraulics the judge was interpreting the definition of SR&ED, and this definition and approach has since been endorsed in a multitude of cases. The judge mentioned the case of RIS-Christie Ltd. v. The Queen (1998), C.W. Agencies Inc. v. Canada (2001), Jentel Manufacturing Ltd. v. The Queen (2011), and R&D Pro-innovation Inc. v. Canada (2016) specifically.

      The judge ruled the Appellant provided no basis to overturn the definition of SR&ED as listed in Northwest Hydraulics, nor to overturn the decisions of the decision made by the Tax Court of Canada in 2019. The judge determined that the Tax Court Judge did not err in applying the criteria as set out in Northwest Hydraulics and as a result dismissed this appeal with costs fixed in the amount of $1,670.

      For more details and analysis, please view our complete analysis of Kam-Press Metal Products Ltd. v. Canada (2021).

      Logix Data Products Inc. v. The Queen (2021)

      Topic: Technical Eligibility – specifically, Expert Witnesses

      The Appellant, Logix Data Products Inc., sought to appeal the reassessment and denial of their SR&ED expenditures and related ITCs made under the Income Tax Act in respect of the Appellant’s taxation year ending June 30, 2013. The SR&ED project in question, the Solar Shingle Project, involved the development of a dual-purpose solar shingle – that is, a solar panel that could replace shingles.

      The Appellant filed an expert report, Report 1, for the court to read prior to the hearing, but noted errors after the submission and later filed to have an amended report replace it. The judge reviewed Report 1 and the Amended Report but dismissed the Appellant’s application to file the Amended Report, determining it was a whole new expert report which was filed and served well after the 90-day deadline. The judge then determined that Report 1 was also inadmissible. Both Report 1 and the Amended Report consisted largely of conclusory statements – statements without explanation, context, or support and did not meet the Expert Report Requirements. The Appellant filed a second application to file a Revised Amended Expert Report, Report 2, and asked the court to waive compliance with the timelines. The judge reviewed the motion based on the four factors outlined in Canada (Attorney General) v. Hennelly (1999).

      The judge dismissed the application, stating that, in the same manner as Report 1 and the Amended Report, Report 2 did not meet the Expert Report Requirements.

      The only witness called forward in this case other than Mr. Baird, the President and CEO of the Appellant, was Amit Saini. Mr. Saini is the founder of National R&D Inc. (“National”). National was engaged by the Appellant to assist with its SR&ED filings and claims. The judge stated that Mr. Saini did not constitute as a participant expert as he was not engaged by the Appellant to assist with the design, testing, analysis of test results or research, nor did he participate in the activities the Appellant undertook that are the subject of this appeal.

      Next, the SR&ED eligibility of the activities carried out by the Appellant during the 2013 fiscal year were determined based on the five criteria observed in Northwest Hydraulic relevant to determining whether a particular activity constitutes as SR&ED.

      The judge determined the goal of the project was more in the nature of a design objective, largely driven by the aesthetics of solar panels, rather than a statement of technological uncertainty. The evidence provided did not persuade the judge that the Appellant undertook sufficient research to conclude that there were technological uncertainties in the field. It was noted that solar shingles did already exist and were available to purchase at the time the Appellant carried out their SR&ED activities in the taxation year of 2013. The judge stated the uncertainties the Appellant noted could have, and were, solved by routine techniques.

      The judge then reviewed the documentation provided which related to the testing completed on the thermal performance test, the load-bearing test, and the wind resistance test. The judge stated that the test description documents all contained far less than was expected and lacked significant details including hypotheses, analysis, and rationale. The judge determined that the testimony and documents the Appellant made available to the Court did not demonstrate that the Appellant applied a scientific or systematic approach to solving the problems, and there was no credible evidence that the solutions employed were anything other than well understood or routine techniques. The judge ruled that the Appellant did not keep sufficient records and documents in respect to the work performed.

      The judge ruled the Appellant failed to prove that the activities conducted constituted as SR&ED and the appeal was dismissed. The costs of the motions and the appeal were awarded to the Respondent.

      For more details and analysis, please view our complete analysis of Logix Data Products Inc. v. The Queen (2021).

      R&D Pro-innovation inc. v. Canada (2016)

      Topic: Technical Eligibility – specifically, Technological Uncertainty

      In this case, the Appellant, R&D Pro-Innovation Inc., appealed the decision made by the Tax Court of Canada (TCC) in 2015 pertaining to the company’s SR&ED claims for the taxation years of 2009 and 2010, in which The judge ruled that there was no evidence suggesting the required systematic approach was followed and that the initial internal CRA decision to reject the Appellant’s SR&ED investment tax credit policy application was to be upheld.

      In this case, the Appellant stated that the TCC judge failed to consider all of the evidence including a letter from the Canada Revenue Agency recognizing that the work did involve technological uncertainty. The judge, in this case, stated that the TCC judge did not err in their analysis and that:

      It must be assumed that the Judge considered all the evidence given before him and that he accepted it, including the letter…

      The Appellant put forward two separate TCC cases in support of its position that the TCC judge erred in applying the criteria to determine whether there was technological uncertainty. The judge, in this case, dismissed both cases stating they did not apply to the case. The judge dismissed the appeal without costs.

      For more details and analysis, please view our complete analysis of R&D Pro-innovation inc. v. Canada (2016).

      Canada v. CHR Investment Corporation (2021)

      Topic: Financial Eligibility – GAAR; Pool of Deductible SR&ED Expenditures

      In this case, the Appellant, the Canada Revenue Agency (CRA), appealed a decision made by the Tax Court of Canada(TCC) in 2020 pertaining to the defendant, CHR Investment Corporation (CHR). In the initial case, CHR requested that the CRA produce six specific documents relating to the five reassessments for the 2009, 2010, 2011, 2012, and 2013 taxation years that were not produced because the CRA deemed the request “is irrelevant and or constitutes a fishing expedition”.  The reassessments were related to the general anti-avoidance rule (GAAR). The CRA denied CHR the ability to utilize tax attributes including a loss carryover amount and an SR&ED carryover amount which had been used to reduce its income for the five taxation years. CHR argued that the six documents they requested could help to damage the CRA’s case and that there had been a misuse of the GAAR rules. The initial appeal was decided on January 17, 2020.

      The focus of this case was on the scope of questions that the representative of the Crown would be required to answer at a discovery examination that related to questions of law, and the scope of the documents that the Crown would be required to produce in relation to questions of law. The judge reviewed past cases including Superior Plus Corp. v. Canada (2015) and Lehigh Cement Ltd. v. R. (2011) and stated:

      The Tax Court Judge made a palpable and overriding error in applying the law to the facts of this case. Although he acknowledged that the case law permitted disclosure of documents on questions of law at the discovery stage when such documents were considered in relation to a taxpayer’s audit or were in the taxpayer’s file, the facts of this case are clear – the requested documentation was not considered in the audit of CHR nor was it in CHR’s file.

      The judge stated that the TTC judge did not establish the relevance of the documents sought in the initial appeal, nor were the documents prepared in the context of the audit of CHR or considered by the officials involved in the audit. The judge pointed out that the nature of the documents requested in such a case is also relevant:

      The requested documents are correspondence between officials at the CRA and the Department of Finance. CHR is seeking such correspondence to determine if such officials expressed an opinion on the rationale of the applicable provisions that is inconsistent with or conflicts with the current position of the Crown.

      In this case, the Defendant, CHR, insisted that they were entitled to know whether the Minister had adopted the same interpretation of the rationale of the GAAR provisions when CHR was reassessed. In response, the judge ruled that since the application of the GAAR, is a question of law, not fact, any prior opinions that may have been expressed in correspondence between the CRA and the Department of Finance are irrelevant, unless such opinions were considered in the course of the audit or the Crown has admitted the relevance of such opinions.

      The judge allowed the appeal, with costs, and set aside the decision of the Tax Court as none of the requested documents were considered by the Minister in invoking the GAAR. The relevance of these documents was not established or admitted by the Crown.

      For more details and analysis, please view our complete analysis of Canada v. CHR Investment Corporation (2021).

      Huang v. Meng (2021)

      Topic: Financial Eligibility – specifically, Inflated Claims

      Evilnut is a software and web design company based in Vancouver. In the initial case in which judgement was made on December 31, 2020, the Plaintiffs Wen Tao Huang (“Tony”), Yu Zhi Peng (“Daniel”) and Yu Cong Peng (“Lucas”) sought judgment against the Defendant, Fei Meng (“Scott Meng) of Evilnut, for a breach of agreements to purchase the Plaintiff’s shares in Evilnut, and also sought an order compelling Scott and the Company to take the necessary steps to transfer the shares in accordance with the share purchase agreements. The judge ruled against the Defendant and instead stated that the plaintiffs were entitled to their costs.

      In this case, a one-day follow-up summary trial, the Plaintiffs submitted that there were grounds for costs to be assessed against the defendants at an elevated scale, as special costs, or alternatively as double costs from the date of the Plaintiffs’ formal offer to settle. The Defendant conceded that the Plaintiffs are entitled to the double costs order that they sought. However, they disputed that an award of special costs was appropriate. To determine if the Plaintiffs were entitled to special costs in this case the judge used the circumstances laid out in Mayer v. Osborne Contracting Ltd. (2011) as well as other cases involving the concept of special costs.

      The Plaintiffs stated that Meng offered to pay them through the payroll of the company to boost their salaries paid and to increase their SR&ED claim. The evidence presented illustrated that the payments to Daniel and Lucas were not submitted as part of their SR&ED claim. The judge agreed that the Defendant lacked credibility and the affidavit evidence was incomplete and internally inconsistent. However, in the circumstances of this case, the defences put forward by the Plaintiffs’ was limited and did not support an award of special costs. The judge dismissed the application for special costs.

      For more details and analysis, please view our complete analysis of Huang v. Meng (2021).

      WRD Borger Construction Ltd. v. The Queen (2021)

      Topic: Technical Eligibility – specifically, Technological Uncertainty, Trial and Error, Contemporaneous Documentation

      The Appellant, WRD Borger Construction Ltd., sought to appeal the decision made by the Minister of National Revenue stating that the Appellant’s SR&ED project completed in the 2015 taxation year did not meet the definition of SR&ED and therefore the related expenditures were disallowed.

      The claimed expenditures were incurred by the Appellant in connection with a construction project involving its activities/efforts to block water flow in a large underground box culvert. The judge used the definition of SR&ED as written in the Income Tax Act and the five questions developed in the Northwest Hydraulic Consultants Limited v. The Queen (1998) to evaluate the eligibility of the Appellants’ SR&ED ITC application. The Judge noted there was uncertainty within the project, however that uncertainty did not reach the level of a technological risk or uncertainty which could not be removed by routine engineering or standard procedures. The judge also noted that the Appellant’s approach was trial and error. As there were no formulated hypotheses, no detailed record-keeping or contemporaneous documentation, and no systematic testing the Judge concluded that the work performed did not meet the eligibility requirements for SR&ED and dismissed the Appellants’ appeal.

      For more details and analysis, please view our complete analysis of WRD Borger Construction Ltd. v. The Queen (2021).

      Robotx Solutions Inc. v. The Queen (2017)

      Topic: Technical Eligibility – specifically, Contemporaneous Documentation, Technological Advancement

      The Appellant, Robotx Solutions Inc. (Robotx), is a private corporation established in 2002 that enhances equipment at their clients’ request, particularly by increasing their life expectancy, by improving their safety mechanisms with a view to making them compliant with current standards or by standardizing them to generate economies of scale. In this case, Robotx sought to appeal the federal Income Tax Act determination made with regards to their scientific research and experimental development (SR&ED) expenditures (and accordingly refundable investment tax credits) pertaining to the Appellant’s taxation year ending on November 30, 2012. The claimed expenditures were incurred by the Appellant in connection with four separate contract projects for four separate companies.

      The initial claimed SR&ED expenditures for the 2012 taxation year had been reassessed and the Minister of National Revenue disallowed $182,483 for SR&ED expenditures claimed in respect of the four contracts. The judge evaluated each project separately using the definition of SR&ED as written in the Income Tax Act in addition to related legal rulings such as Northwest Hydraulic Consultants Limited v. The Queen (1998) to evaluate the eligibility of the Appellants’ SR&ED ITC application. The Judge noted the documentation presented was inadequate, and the Appellant failed to prove that any technological advancement had been sought and that therefore there was no proof of technological uncertainty relating to the projects. The judge stated that the Appellant did not persuade them that they carried out experimental development within the meaning of the Act and therefore the appeal was dismissed without costs.

      For more details and analysis, please view our complete analysis of Robotx Solutions Inc. v. The Queen (2017).

      Summary of SR&ED Updates

      SR&ED program updates from April-June 2022 were quiet, however, at SR&ED Education and Resources continued our educational mandate, writing six more informative blog posts, analyzing eight more legal rulings, and keeping our reader up to date regarding topics that may affect the SR&ED program. Check back for more updates as we continue through 2022.

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