SR&ED Program Updates: January-March 2023
What happened with SR&ED in the third quarter (January-March) of 2023? Here, we discuss the updates.
This post outlines Scientific Research and Experimental Development (SR&ED) program updates from January-March 2023, including administrative, policy, tax law, and court cases. SR&ED Education and Resources was quiet in the first quarter of 2023. Still, we kept our readers up to date, including summarizing three legal rulings on the subject of SR&ED, examining how Refundable and Non-refundable SR&ED Tax Credits work in the SR&ED program, and detailing the SR&ED Program Policy changes made by the CRA in this quarter.
SR&ED Policy and Program Updates
There were no new SR&ED policy or program update announcements in the first quarter of 2023. The What’s new – SR&ED Program 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 first quarter of 2023, we published two posts discussing some potentially confusing topics in the SR&ED program:
- On January 10, 2023, we detailed the difference between the two forms of SR&ED ITCs, refundable and non-refundable, and when they may be received in “A Closer Look at Refundable and Non-refundable SR&ED Tax Credits“.
- On March 14, 2023, we examined the difference between Non-arm’s length (NAL) vs Arm’s length contracts, how their respective expenditures will impact your SR&ED return, and how to complete the related SR&ED tax claim forms to increase your final SR&ED refund in our article “Non-arm’s length vs Arm’s length Contract Expenditures in SR&ED“.
Administrative, Policy, and Legislative
In the first quarter of 2023, we published two articles regarding SR&ED news and information updates from the CRA:
- The Public Service Alliance of Canada (PSAC) has chosen to call for strike votes which may impact taxpayers’ 2023 tax returns. On March 17, 2023, we published “Public Service Alliance of Canada Strike May Impact Your Tax Claim“, in which we recommend that individual and corporate taxpayers submit their tax returns early to avoid any delay.
- On March 28, 2023, we summarized the federal budget for 2023. We highlighted the key elements of the budget that may impact the theSR&ED program in SR&ED in the Federal Budget: Much Ado About Nothing. Or is it? (2023).
In the first quarter of 2023, we summarized three SR&ED court rulings for our readers.
Atelier Béton Inc. v. The Queen (2022)
Topic: Technological Eligibility – specifically, Scientific Method & Trial and Error
The Appellant is a company specializing in the development of different concrete products for various commercial and residential applications. The Appellant’s SR&ED claim of their 2015 taxation year including expenditures of $63,134 and SR&ED ITCs of $23,822; the Appellant appealed the ruling in 2017 after the CRA’s research and technology advisor (RTA) visited their shop and completed SR&ED Review of the two projects that were submitted in the Appellant’s claim.
This case is unique as the chemical engineer, Mr. Benjamin Bousquet, hired as the main contractor for the Appellant’s research and development activities passed away in 2017.
The Appellant testified that the research activities for both projects were not carried out by trial and error as claimed by the CRA, but that they adopted a systematic approach in carrying out their work, as evidenced by the experimental test sheets prepared by Mr. Bousquet for the modular panels and by himself for the polished concrete floors.
The Respondent’s expert witness, David Migneault, was recognized as an expert in chemistry related to the manufacture of concrete products. In his view, neither of the Appellant’s two research projects fit the definition of SR&ED in the Act because the five questions set out in the leading case of Northwest Hydraulic Consultants Ltd. v. The Queen (1998), were not fulfilled.
The distinction between experimental development and “Trial and Error” often comes down to whether the only knowledge generated is “it worked” or “it didn’t work”. If there is no further analysis, it is considered Trial and Error. Mr. Migneault noted during his review that “the Appellant did not examine the possible causes of its failures”. In his review of the modular panel project that:
- the appellant did not attempt to find the cause of the moulds’ lack of durability; and,
- the methods of measuring mechanical resistance (in compression and bending) were not identified and the values were not reported;
These are just two examples noted by the expert witness which illustrate that the Appellant did not thoroughly analyze nor follow through with analyzing the results obtained from their experiments. The expert witness concluded that the technical information provided by Mr. Tremblay was not sufficient for the experiments to be considered SR&ED.
The judge also utilized the five questions of eligibility posed by Justice Bowman to assess the Appellant’s work. He determined that neither of the Appellant’s research projects involved any scientific or technological uncertainty, and the Appellant did not adopt a scientific method in carrying out its research activities but rather used a trial-and-error methodology. The judge stated:
“The appellant adopted standard practices to resolve the technical difficulties encountered at each stage of the development of its products.”
While the Appellant did succeed in developing modular concrete panels and polished concrete floors that met the desired characteristics, they did so by using known technologies to solve the technical problems that they encountered. The judge determined that the overall approach was not intended to achieve a scientific or technological advancement, and the documentation (the experiment sheets) submitted by the Appellant was “clearly insufficient”. The Appellant’s appeal for the 2015 taxation year was dismissed without costs.
For more details and analysis, please view our complete analysis of Atelier Béton Inc. v. The Queen (2022).
Quebec Revenue Agency c. PCI Géomatics Entreprises inc. (2020)
Topic: Financial Eligibility – specifically, Government Assistance & The SADI Program
The Quebec Revenue Agency (QRA), the Appellant, appealed the rectified judgement by the Court of Quebec in 2019 in which the appeal of PCI Géomatics Entreprises inc. (PCI), the Respondent, was allowed.
The Appellant stated that the trial judge erred in concluding that the contributions made by the Canadian government under the Strategic Aerospace and Defense Initiative (“SADI”) to PCI during their 2012, 2013 and 2014 taxation years did not constitute government assistance. The Appellant believes that the amounts are true “government assistance” and should have been claimed as such.
The judge stated that his initial opinion was “that the terms of the agreement concluded between PCI and the Government of Canada clearly make PCI’s obligation to reimburse the contribution made by the government conditional”. To come to a final and fully formed decision the judge completed a thorough evaluation of the SADI agreement, which was signed in 2010 by PCI and the Government of Canada. The formula within the agreement ensures that “PCI must repay the contribution received over 15 years if its gross revenues are stable. It may have to repay up to 1.65 times the contribution received if its income increases sufficiently during the fifteen-year repayment period but may also have nothing to repay if it decreases throughout it.”
The Judge agreed that the fact that the obligation to repay expires after 15 years, independently of the amount reimbursed until then by PCI, constitutes a forgiveness clause and thereby makes the loan conditional and, “by the same token, government assistance within the meaning of the Income Tax Act.”
For this reason, the judge granted the QRA’s appeal, reversed the rectified judgement rendered by the Court of Quebec, and reinstated the notices of assessment issued by the QRA for the years 2012, 2013 and 2014.
For more details and analysis, please view our complete analysis of Quebec Revenue Agency c. PCI Géomatics Entreprises inc. (2020).
Bhatnagar v. Cresco Labs Inc. (2022)
Topic: Financial Eligibility – specifically, SR&ED Consultant Fees & Contract Interpretations
The Appellant, Gopal Bhatnagar, Ashutosh JHA, and Boris Giller, sold their shares in a vape company, 180 Smoke, to CannaRoyalty Corp. d/b/a Origin House, the Purchaser, in February of 2019 under a share purchase agreement (SPA). In April 2019 the outstanding shares of Origin House were subsequently acquired by the Respondent, Cresco Labs Inc., a large cannabis operator in the United States. The issues raised in this case required the court to determine the Appellant’s entitlement to certain revenue & license milestone payments and to determine whether the Purchaser breached its obligations under the SPA. These issues are not related to Scientific Research and Experimental Development (SR&ED), however, this case also involved another dispute unrelated to the Revenue and License Milestone Payments that is SR&ED-related.
After the SPA was finalized, 180 Smoke retained consultants to assist in completing their SR&ED claims for their 2017 and 2018 fiscal years. A total of $21,565.62 was incurred in consulting fees. The issue, in this case, is whether or not the consultant’s fees should be deducted from the SR&ED credits that 180 Smoke received in 2020. Under the SPA in Section 2.8, these amounts are acknowledged to be payable to the Appellant as working capital. The Respondent disagreed and sought to deduct the consulting fees from the ITCs that it was obligated to pay to the Appellants.
 Section 2.8 of the SPA provided for a working capital adjustment, based on a preliminary net working capital statement to be prepared by the purchaser and subject to a process of objections and eventual submission to an accountant for determination. The parties agree that the SR&ED tax credits for 2017 and 2018 would come within this adjustment provision.
The total SR&ED credits, which were received by 180 Smoke in 2020, amounted to $188,000.49 ($90,437 for F2017 and $97,557 for F2018). In the SPA the parties agree to an initial reduction from the total credits received to account for half of the 2017 credit that had been recorded as receivable by 180 Smoke before closing. This brought the total down to $142,775.50.
The Respondent acknowledged that the Appellants were owed payments for SR&ED credits but sought to deduct the consulting fees, totalling $21,565.62, from the ITCs that it was obligated to pay. This would bring the total amount owing down to $121,215.88.
For more details and analysis, please view our complete analysis of Bhatnagar v. Cresco Labs Inc. (2022)
Summary of SR&ED Updates
SR&ED program updates from January-March 2023 were quiet; however, we wrote two more informative blog posts, summarized three 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.
Share your thoughts on the recent SR&ED program updates