SR&ED Program Updates: October-December 2023
What happened with SR&ED in the fourth quarter (October-December) of 2023? Here, we discuss the updates.
This post outlines Scientific Research and Experimental Development (SR&ED) program updates from October to December 2023, including administrative, policy, tax law, and court cases. SR&ED Education and Resources was busy in the fourth and final quarter of 2023. We kept our readers up to date, including summarizing two legal rulings on the subject of SR&ED, updating readers on the SREDstakeholder’s Virtual Meeting, examining how the CRA may utilize information gleaned during an audit on SR&ED tax credits toward resulting criminal investigations, discussing how factoring may benefit SR&ED claimants, and more.
SR&ED Policy and Program Updates
There was no new SR&ED policy or program update in the fourth quarter of 2023. 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 fourth quarter of 2023, we published four posts discussing some potentially confusing topics in the SR&ED program:
- On October 3, 2023, we published “Benefits of SR&ED Factoring in the Current Market Environment (2023) – MuckerFi“, in which we discussed SR&ED factoring, a type of financing, which is a significantly quicker process than alternatives offered through financial institutions such as loans and lines of credit. We also introduced the company MuckerFi, which provides factoring, or financing, to promising and exceptional entrepreneurs in Canada and the United States to help launch and scale their new ventures.
- On December 21, 2023, we discussed the recent legal ruling of Gordon v. Canada (2023), which brought to light the issue of what happens when the CRA utilizes information gleaned during an audit on SR&ED tax credits toward a resulting criminal investigation in our article “SR&ED & Criminal Investigations – Lessons from Gordon v. Canada (2023)“
Administrative, Policy, and Legislative
In the fourth quarter of 2023, we published one article regarding SR&ED news and information updates from the CRA:
- On December 21, 2023, we informed our readers of a statement published by the Department of Finance in “Update on Federal Innovation Policies and Initiatives Issued December 19, 2023“.
2023 SREDstakeholder Virtual Webcast
On November 30, 2023, the SREDstakeholder group held their annual virtual webcast on SR&ED topics:
- On November 9, 2023, we published an event notification for the 2023 SREDstakeholder virtual webcast in “SREDstakeholders Virtual Meeting – November 30, 2023“.
- On December 20, 2023, we discussed the 2023 SREDstakeholder webcast in our article “Summary of 2023 SREDstakeholders Webcast“. A variety of topics were covered including analysis of recent SR&ED tax court cases, new patent incentives and their synergies with SR&ED claims, and issues encountered in SR&ED for Medical and Dental Professional Corporations (MPCs & DPCs).
See the entire “Nov. 30, 2023 Webcast SREDStakeholder.CA“ presentation on the SREDStakeholder YouTube channel.
Judicial Proceedings
In the fourth quarter of 2023, we summarized two SR&ED court rulings for our readers.
Mold Leaders Inc. v. The King (2023)
Topic: Technological Eligibility – specifically, Routine Engineering & Technological Uncertainty
The Appellant, Mold Leaders Inc. (ML), conducted a business of injection molding, computer numerically controlled machining and prototype injection molding for clientele including from the automotive industry. In this case, the Appellant sought to appeal the reassessments of their 2016 and 2017 taxation years made by the Minister of National Revenue (the “Minister”). The Minister concluded that “the Appellant did not identify or encounter any technological uncertainty which could not be removed by the Appellant’s knowledge base”, and therefore denied the Appellant a deduction of $44,356 claimed as scientific research and experimental development (“SR&ED”) expenditures in the 2016 tax year and $156,524 claimed as SR&ED expenditures in the 2017 tax year, as well as the corresponding investment tax credits (“ITC”) of $17,618 and $70,868 respectively.
To begin the Judge reviewed the initial testimony of the Appellant’s primary witness, Mr. David Duong, for evidence of technological uncertainties. The Judge then used the definition of SR&ED as written in the Income Tax Act, and the five-factor test first posed by Judge Bowman within the case of Northwest Hydraulic Consultants Ltd. vs. The Queen (1998), to determine if the Appellant’s research activities met the definition of SR&ED activities and that the expenses it incurred were deductible expenses for SR&ED and therefore eligible expenses for the calculation of the ITC.
The Appellant had retained the company National R&D Inc. as an expert witness for their case, however, because the individual from National R&D Inc. “did not have sufficient background in the plastic injection molding industry to be qualified as an expert in that industry”, he was not accepted as an expert and his expert report was not admitted into evidence. The Judge determined the Appellant’s process was “indicative of routine engineering or standard procedures”.
The Judge determined that there was no technological or scientific uncertainty within any of the eight projects. As the Appellant did not meet its burden of proof and did not demonstrate, on a balance of probabilities, that there was technological uncertainty or that its activities constituted SR&ED activities, there was no need to review the question of eligible expenses and the appeal was dismissed without costs.
For more details and analysis, please view our complete analysis of Mold Leaders Inc. v. The King (2023).
Gestion ACBK Inc. v. The King (2022)
Topic: Technological Eligibility – specifically, Routine Engineering & Technological Uncertainty
The Appellant, Gestion ACBK Inc. (“ACBK Management”), formerly named Hydro LMR Inc. (“Hydro LMR”) before a merger, sought to appeal the reassessments of their 2012 taxation years made by the Minister of National Revenue (the “Minister”). The Minister denied the Appellant a deduction of $115,267 claimed as scientific research and experimental development (“SR&ED”) expenditures, as well as the corresponding investment tax credit (“ITC”) of $37,945. The Appellant incurred these expenditures during the installation of a hydrodynamic energy-efficient assistance system in a residential building. The Appellant’s objective for the project was to install an upgraded version of a hydrodynamic system, originally patented by Mr. Laperle, into a residential triplex. The Appellant utilized Mr. Laperle’s handwritten notes as a reference to design and implement a second prototype of the hydrodynamic system at the triplex.
During the hearing, the Appellant acknowledged that certain expenses incurred by Hydro LMR during the construction and installation of the system, and related to the purchase of intellectual property did not qualify as eligible SR&ED. Consequently, the Appellant declared a total of $106,051 as SR&ED expenses as opposed to the originally claimed deductions of $115,267.
The Judge used the definition of SR&ED as written in the Income Tax Act, and the five-factor test first posed by in the case of Northwest Hydraulic Consultants Ltd. vs. The Queen (1998), to determine if the Appellant’s work met the definition of SR&ED and if the associated expenses incurred were eligible expenses for the calculation of the SR&ED ITC.
The Judge determined that the Appellant used common techniques to try to resolve the technological uncertainties they faced during their project. The Judge also noted that the Appellant did not describe the techniques used in order to try to overcome these uncertainties, neither during the design nor the construction of the system. Additionally, an analysis of Mr. Laperle’s original patent, revealed references to other previous patents relating to thermal storage since the 1980s, indicating that there were already systems similar to that designed.
Consequently, the Judge concluded that the activities of the Appellant during the design and installation of the hydrodynamic system at the triplex did not constitute SR&ED activities within the meaning of the ITA and the appeal was dismissed with costs.
For more details and analysis, please view our complete analysis of Gestion ACBK Inc. v. The King (2022).
Summary of SR&ED Updates
SR&ED program updates from October to December 2023 were busy; we wrote five 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 enter 2024.
Share your thoughts on the recent SR&ED program updates