This post outlines Scientific Research and Experimental Development (SR&ED) program updates from July-September 2021, including administrative, policy, tax law, and court cases. With the federal election and the ongoing presence of Covid-19 affecting the country’s focus and atmosphere, SREDucation has been busy keeping our readers up to date. We have identified some key trends to watch in the SR&ED environment.
SR&ED Policy and Program Updates
On August 13, 2021, the Canada Revenue Agency (CRA) released a new SR&ED policy document to replace the ‘Eligibility of Work for SR&ED Investment Tax Credits Policy’. The new policy, ‘Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives’, aims to simplify the information about the SR&ED program and “provide clearer and simpler information about how SR&ED work is defined under the Income Tax Act”. The new policy splits the key requirements into two sections, “Why” and “How”. These sections explains the conditions under which work can be considered as eligible for SR&ED. To read about the new steps in determining SR&ED eligibility, and how they have been changed from the original policy, see our article New SR&ED Policy: Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives.
These updates were released on the CRA’s What’s new – SR&ED Program page. This page is an important source of information for SR&ED taxpayers. The CRA posts any changes and updates which occur within the SR&ED program by order of date here.
SR&ED Education and Resources Articles
SR&ED Education and Resources spent the July-September 2021 summer months providing helpful guidance on how SR&ED may apply within a commercial setting, and examining a pertinent SR&ED related legal ruling, in the hopes of further illuminating the world of SR&ED.
- First, we educated our readers on the different ways SR&ED investment tax credits (ITCs) may be claimed during a production run in SR&ED During a Production Run.
- We then analyzed the key lessons and takeaways for our readers in our article MDA Systems Ltd. C. Agence du Revenu du Quebec: Contract Payments and SR&ED. This legal ruling contained important lessons for taxpayers about contract payments in SR&ED.
The federal election occurred on September 20, 2021. In an effort to give our readers an idea of each parties stance and promises in regards to the SR&ED program, and to share information necessary to help our readers come to their decisions and make their votes count, we published:
- Canadian Conservatives call for Innovation and SR&ED Reform
- Liberal Party Promises SR&ED Reform
- Other Party Positions on Innovation and SR&ED: NDP, Green, PPC, Bloc.
With the re-election of a Liberal minority government, we encourage our readers to explore how this outcome may affect the SR&ED program in the coming years by examining each party’s platform and stance.
Following along with the success of our Q1 and Q2 2021 blog posts, we continued to delve into topics of interest and demystify the SR&ED application process for prospective claimants.
- This summer 2021 we first examined the topic of the Prescribed Proxy Amount Cap, when it is applicable, and how it may affect your SR&ED claim in What is the Prescribed Proxy Amount (PPA) Cap?
- Next we took a look at the question of Is your SR&ED refund considered taxable income? In this article, we examine the definition of the SR&ED refund, how ITCs are applied and when and how SR&ED should be claimed as taxable income.
Administrative, Policy, and Legislative
The third quarter of 2021 was quiet in regards to SR&ED news and information updates from the CRA. We notified our readers of the public seminar hosted by the Toronto West-Thunder Bay Tax Services Office (TSO) which occurred on July 13, 2021, on our Training, Courses and Events page.
The Tax Court of Canada announced an update to their in-person hearings, canceling them due to Covid-19 restrictions between August 16, 2021, and September 10, 2021. On June 1, 2021, they posted the “Notice to the Public and the Profession, June 1, 2021“. We summarized this post on our site, Tax Court of Canada In-Person Hearings Update June 2021.
In terms of judicial proceedings, Q3 was quiet. We analyzed four SR&ED court rulings for our readers.
MDA Systems Ltd. C. Agence du Revenu du Quebec (2020)
This ruling addressed the issue of contract payments. The Appellant, MDA, entered into several contracts with the Canadian Space Agency (CSA), for the RADARSAT Constellation Mission program (RCM Program). The contract totalled over $1B. During the taxation years of 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. 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 with costs in favour of the defendant.
For more details and analysis, you view our complete analysis of MDA Systems Ltd. C. Agence du Revenu du Quebec (2020).
Allegro Wireless Canada Inc. vs. The Queen (2021)
This ruling addressed the role and importance of expert witnesses during SR&ED legal proceedings. Allegro Wireless, the Appellant, submitted SR&ED investment tax credit (ITC) claims in the 2010 and 2011 tax years. The CRA disallowed ITCs as it was unclear if SR&ED had occurred. The appellant provided one expert witness on their behalf and the respondent, The Crown, provided two. First, a two-step test, cited in White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23, was used to determine the admissibility of the expert witnesses. The two expert witnesses provided by the Respondent were deemed to be qualified in their fields by the judge, however, the factual foundation of their reports was ruled to be based on insufficient information and were therefore deemed inadmissible. The judge used the five questions of eligibility from Northwest Hydraulic and CW Agencies, and the opinion of the Appellant’s expert witness to determine if the projects in question constituted as SR&ED. Allegro used Jira X to effectively track their work which the Appellant’s CRA scientific research and technology advisor, Mr. Wong, assisted in setting up. The judge ruled the qualifying SR&ED expenditures for the 2010 taxation year were $449,878 and SR&ED ITCs for the 2010 taxation were $157,457; for the 2011 taxation year the qualifying SR&ED expenditures were $508,351 and SR&ED ITCs were $177,923. The appeals were allowed with costs and the reassessments were referred back to the Minister for reassessment.
For more details and analysis, you view our complete analysis of Allegro Wireless Canada Inc. vs. The Queen (2021).
Huang v. Meng (2020)
This ruling addressed the issue of eligible salary or wages expenditures. The plaintiffs, in this case, included Wen Tao Huang (“Tony”), Yu Zhi Peng (“Daniel”), and Yu Cong Peng (“Lucas”). They claimed that they made oral agreements with Meng, the defendant, that Meng would purchase their shares in the company. Over two years Meng made more than 50 payments before he stopped paying. Meng claimed there were no share purchase agreements, the payments were for shareholder loans that had been fully repaid. Meng paid the plaintiffs for their shares primarily through the company’s payroll and partially through his personal checking account. 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 ruled that plaintiffs were entitled to their costs and the judge ruled against the defendant.
For more details and analysis, you view our complete analysis of Huang v. Meng (2020).
R. c. Comparelli (2020)
This ruling addressed the issue of fraud and is a criminal case against the defendant, Americo Comparelli, who was a Scientific Research and Experimental Development (SR&ED) Financial Reviewer (FR) at the Canada Revenue Agency while also a silent partner in a private firm that was engaged in the business of preparing and filing SR&ED claims (Delvex). First, the judge examined the charge of conspiracy to commit fraud and ruled that the fact that the defendant was a ghost shareholder in Delve and also acted as a Financial Reviewer for the firm’s clients meets the fraudulent means criteria. Next, the judge examined the breach of trust charge. The essential elements for corruption set out in Boulanger were used to determine that the defendant met the first three elements: (i) the accused was an official; (ii) he was acting in connection with the duties of his office; and (iii) he breached the standard of responsibility and conduct demanded of him by the nature of his office (i.e., the conflict of interest is obvious). The judge ruled that it did not matter that no errors were found in the defendant’s review of Delvex’s clients, he was auditing his own clients and it was improper rising to the level of criminal. The judge dismissed the fraud charge as there was no evidence of fraud or errors in the defendant’s reviews. The judge ruled that the defendant had the motivation to receive a financial benefit from Delvex and was guilty of breach of trust and conspiracy to commit a breach of trust.
For more details and analysis, you view our complete analysis of R. c. Comparelli (2020).
Summary of SR&ED Updates
SR&ED program updates from July-September 2021 were busy as the country dealt with the pandemic and how to resume operations. As in the prior three months, SR&ED Education and Resources continued our educational mandate, writing fourteen more informative blog posts. Check back for more updates as 2021 continues.