SR&ED Updates Q4 2017 (October to December)
Attention: Policies May Have Been Updated *** Some of the policies referenced were updated 2021-08-13. We are working to update this article and others. *** |
SR&ED Updates and Developments from the fouth quarter of 2017.
Regarding SR&ED, the fourth quarter of 2017 was fairly silent; the Canada Revenue Agency’s (CRA) SR&ED online news page showed no results for this quarter, and a search of online and media databases revealed nothing regarding SR&ED in the news.
There were two Tax Court of Canada appeals, and although they yielded fairly standard decisions without any real surprises, it is worth looking at these rulings for their insight into SR&ED eligibility.
CRA Policy and Administrative Updates
There were no CRA policy and administrative updates for this quarter.
Relevant Judicial Proceedings
There were two Tax Court of Canada rulings made in this quarter.
Lehigh Hanson Materials Limited v. The Queen (2017-10-06)
This Tax Court of Canada case sought to answer the following question brought forth by Lehigh Hanson Materials Limited (the “Appellant”):
Does ‘experimental development’ as defined in paragraph (c) of the definition of ‘scientific research and experimental development’ (SR&ED) in subsection 248(1) of the Income Tax Act … constitute SR&ED [even] if other industry participants (located in or outside of Canada) have achieved the particular or a similar ‘technological advancement’ in their particular circumstances? 1
The Appellant is a private Canadian corporation and a wholly-owned subsidiary of a United Kingdom company. In the taxation years ending December 31 in 2009, 2010 and 2011, the Appellant conducted business in Canada and its primary businesses were cement, ready-mixed concrete, aggregates, and pipe and cement products. The business used alternative fuels such as construction and demolition waste and mixed plastic and paper in the cement kiln in one of its plants located in British Columbia. The Appellant experienced issues and obstacles working on the project and sought to understand and overcome those concerns. Thus, it applied for SR&ED tax credits in each of the relevant taxation years.
However, the CRA dismissed the tax credits (which were worth $782,576) on the basis that it is common practice to use alternative fuels in cement kilns and that there were no technological uncertainties nor technological advancements. According to the CRA’s position, “any issues that arose while using alternative fuels could be resolved by applying known practices, techniques and methodologies.” 2 The CRA felt that the work constituted routine engineering and standard practice.
The judge ruled that the Appellant would need to confirm that they had met the five requirements necessary to have conducted SR&ED. If the Appellant could not confirm they had met these requirements, then their question of whether experimental development could “constitute SR&ED if other industry participants (located in or outside of Canada) have achieved the particular or a similar ‘technological advancement’ in their particular circumstances” 3 could not be answered. The requirements, or questions, that ascertain whether SR&ED has been conducted are as follows:
- Was there a scientific or a technological uncertainty?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
- Was a record of the hypotheses tested and the results kept as the work progressed? 4
The judge agreed with the CRA that the work did not constitute SR&ED and found the wording of the Appellant’s question to be “structurally flawed.” 5 The judge found that the Appellant’s question of whether experimental development could “constitute SR&ED if other industry participants (located in or outside of Canada) have achieved the particular or a similar ‘technological advancement’ in their particular circumstances” 3 could not be answered conclusively as the Appellant had failed to present adequate information. This case highlights the importance of an SR&ED project addressing each of the five requirements stated in the Eligibility of Work for SR&ED Investment Tax Credits Policy.
Mac & Mac Hydrodemolition v. the Queen (2017-12-22)
The following Tax Court of Canada case shows that it is important to keep detailed notes of your SR&ED project – so detailed that another professional in your field would be able to replicate your experiment.
Mac & Mac Hydrodemolition (the “Appellant”) claimed various investment tax credits, including SR&ED, in its taxation years ending July 31, 2012 and 2013. A client approached the Appellant to undertake two projects involving a rubber and polyurethane-coated metal pipe that transported bitumen. The first project involved removing all of the lining, and the second involved removing only the polyurethane coating in the pipe. The removal of the materials in both projects involved the use of high-pressure water.
Similarly to the Lehigh Hanson Materials Limited v. The Queen case highlighted above, the judge referenced the five requirements that ascertain whether or not SR&ED has been carried out. The judge did not say whether the Appellant met all the requirements set forth in questions one to four; however, the judge did note that the Appellant failed to meet the fifth requirement: “Was a record of the hypotheses tested and the results kept as the work progressed?” 7
The Appellant had kept handwritten notes that were updated weekly, and a spread sheet with some detail; however, the judge found these to be “vague.” 8 Additionally, the judge stated that, “the notes do not contain any hypotheses. There is no way of telling what [the Appellant] hoped to achieve from the changes. The notes also contain scant details about the changes being made.” 9 The notes also contained very little detail about the test results, and the judge highlighted that “there is simply no way that someone, even someone very experienced in the industry, could hope to replicate or confirm [the Appellant’s] results from these notes.” 10
The judge dismissed the case citing that the project did not meet the fifth requirement for the work undertaken to qualify as SR&ED. This case serves as a reminder to keep detailed notes and records as your work progresses and to ensure your project meets all five of the requirements set out in the Eligibility of Work for SR&ED Investment Tax Credits Policy. 11
SR&ED in the News
There was no mention of the SR&ED program online or in Canada’s major newspapers during this quarter.
Summary of Q4 SR&ED Updates
The fourth quarter of 2017 was quiet regarding SR&ED in CRA administrative and policy updates, and the media. Although two court cases were heard in the quarter, these served only as reminders for those hoping to claim SR&ED that it is imperative that all requirements set out in the Eligibility of Work for SR&ED Investment Tax Credits Policy are met.
In the first quarter of 2018 the new Federal Budget will be published. We are also anticipating the 2018 Report on Federal Tax Expenditures (usually published a month ahead of the Federal Budget,) that will report on projected spending on SR&ED in 2018. In summary, we expect SR&ED will feature much more prominently on the government and national news outlets in the first quarter of 2018.