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SR&ED Program Updates: April-June 2023

SR&ED Program Updates: April-June 2022
SR&ED Program Updates: April-June 2023

What happened with SR&ED in the second quarter (April-June) of 2023? Here, we discuss the updates.

This post outlines Scientific Research and Experimental Development (SR&ED) program updates from April-June 2023, including administrative, policy, tax law, and court cases. SR&ED Education and Resources was busy in the second quarter of 2023. We kept our readers up to date, including summarizing two legal rulings on the subject of SR&ED, examining the consequences of providing fraudulent information in your SR&ED claim, detailing a new Investment Tax Credit coming to Ontario for manufacturers in the near future, and more.

SR&ED Policy and Program Updates

There was only one new SR&ED policy or program update in the second quarter of 2023:

  • On April 13, 2023, the Income Tax Rulings Directorate’s mailing address found in section 11.3.2 of the Third-Party Payments Policy was updated.

The SR&ED news and updates page is an important source of information for SR&ED taxpayers as the CRA lists any changes or updates to the SR&ED program by order of date.

SR&ED Education and Resources Articles

In the hopes of further illuminating the world of SR&ED during the second quarter of 2023, we published three posts discussing some potentially confusing topics in the SR&ED program:

Administrative, Policy, and Legislative

In the second quarter of 2023, we published three articles regarding SR&ED news and information updates from the CRA:

Judicial Proceedings

In the second quarter of 2023, we summarized two SR&ED court rulings for our readers.

Buhler Versatile Inc. v. The King (2023)

Topic: Technological Eligibility – specifically, Systematic Investigation & System Uncertainty

In this hearing, the Appellant, Buhler Versatile Inc., sought to appeal the federal Income Tax Act determination made by the Minister of National Revenue pertaining to the Appellant’s 2005 taxation year. The Minister disallowed the Appellant’s 2005 scientific research and experimental development (SR&ED) claim for qualified expenditures totalling $3,591,220 with respect to seven projects. This is a unique case as the entire process took 18 years to complete, which is extremely unusual. While the judicial process is not known for being quick, an 18-year process is much longer than normal. In recent years this process was drawn out by the Covid-19 pandemic making in-person judicial proceedings impossible; however, the reasoning for the excessive time delay between 2005-2019 is unknown. 

The Appellant is an agricultural equipment manufacturer located in Winnipeg that specializes in the manufacture of agricultural tractors. The bulk of the SR&ED expenditures incurred in the Appellants 2005 fiscal year concerned their 5th project, in which the Appellant aimed to create a line of high-horsepower 4WD tractors which met Tier II emission standards and were suitable for agricultural and commercial construction (e.g. scraping/earth-moving/levelling) applications. 

This hearing began in September 2019, and due to the Covid-19 pandemic, did not reach its conclusion until February of 2023. In determining whether the Appellants’ work during the 2005 taxation year constituted SR&ED, the Judge asked if “the work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, or products or processes, including incremental improvements thereto.” The judge evaluated the Appellant’s work against Chief Justice Bowman’s 5 questions in Northwest Hydraulic Consultants Ltd. v. The Queen (1998).

  1. Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
  2. Did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
  3. Did the procedure adopted accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses?
  4. Did the process result in a technological advancement?
  5. Was a detailed record of the hypotheses tested, and results kept as the work progressed?

In examining whether the Appellants work contained technological uncertainty(ies), Justice Bowman’s first question, the judge determined that the technological uncertainty, in this case, fit under the description of a system uncertainty as all of the parts needed to function successfully together to achieve the Appellant’s objective:

“when all the individual parts were combined, their individual uncertainties were merged into a system uncertainty and the system uncertainty was the entire tractor.”

The judge also noted that “While the techniques and testing methods were known, the resolution of this system uncertainty was not reasonably predictable.”

In examining whether the Appellant’s work formulated hypotheses specifically aimed at eliminating the technological uncertainties, Justice Bowman’s second question, the judge stated that “this criterion is satisfied.” While the Appellant “did not always know whether a specific theory would successfully resolve a particular issue“, their work “was focused and methodical in the way it uncovered, recognized, and resolved the issues“, and they proved they always knew why they were testing that theory.

In examining whether the Appellant’s work resulted in technological advancement, Justice Bowman’s third question, the judge stated, “Given the fact that the new tractor was for a time, the most powerful one of its kind available by a significant margin, I am of the view that this criterion is satisfied.“.

Finally, the judge that the Appellant’s documentation was “sufficiently detailed and thorough“. The judge commented on the Appellant’s documentation, stating: “While imperfect and incomplete, they were sufficient for the purposes of the work“.

The judge ruled that the Appellant’s “activities with respect to the 535-HP tractor in project 5 (4WD Phase D Tier II High HP) constituted SR&ED in the 2005 taxation year“, and they were therefore entitled to costs. The parties were given a deadline to reach an agreement on costs between themselves.

For more details and analysis, please view our complete analysis of Buhler Versatile Inc. v. The King (2023).

JEC Distributors Inc. v. The King (2022)

Topic: Technological Eligibility – specifically, Routine Engineering & Technological Uncertainty

The Appellant, JEC Distributors Inc., is a company who manufactures and distributes products for the auto industry. For their 2016 tax year, the Appellant claimed Scientific Research and Experimental Development ITCs for three different projects. The first project, “Data Link Flow Monitor,” aimed to develop a system of sensors that could be applied to each welding gun to monitor the flow and temperature of the water to that gun. In the Appellant’s second project, “Anti-Fouling Chip Collector Improvement,” the Appellant wanted to develop a way of reliably collecting the waste chips made from the use of the dressing system. The third project (referred to as Project 4 by the parties) was called the “Method to Prevent Sealer Buildup on Dressing Blades” and dealt with finding a way to manage the adhesives and sealants that get on the welding tips during the welding process.

The Appellant claimed SR&ED expenditures of $91,537, but the Minister of National Revenue denied their claim. In this case, the Appellant sought to appeal the minister’s reassessment. The judge used the first test set forth by Justice Bowman in Northwest Hydraulic Consultants Ltd. v. The Queen (1998) to determine whether there was technological risk or uncertainty which could not be removed by routine engineering or standard procedures. The judge reviewed all three of the Appellant’s projects and determined that none of them contained any technological risk or uncertainty. The judge stated that “The Appellant applied what appears to be routine engineering or standard procedures” for all three projects. The appeal was dismissed.

For more details and analysis, please view our complete analysis of JEC Distributors Inc. v. The King (2022).

Summary of SR&ED Updates

SR&ED program updates from April-June 2023 were busy; we wrote six more informative blog posts, summarized two more legal rulings, and kept our readers up to date regarding topics that may affect the SR&ED program. Check back for more updates as we continue through 2023.

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