Summary of 2023 SR&ED Stakeholders Webcast
On November 30, 2023, Scientific Research and Experimental Development (SR&ED) stakeholders participated in the 2023 SR&ED Stakeholders 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). It was enlightening to hear varying perspectives on SR&ED issues that impact stakeholders.
2022-23 SR&ED Tax Cases
The 2023 SR&ED Stakeholders webcast discussed 8 tax court cases resolved between 2022- 2023 which have important lessons for SR&ED. The main themes discussed were technological advancement, extension of technology, defining standard practice, and systematic investigation.
Buhler Versatile Inc. (Win)
The first tax case discussed was Buhler Versatile Inc. v. The King (2023), which was presented by Justin Frape. The Appellant in this case was an agricultural equipment manufacturer located in Winnipeg, MB that specializes in the manufacture of agricultural tractors. 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. The five questions from Northwest Hydraulic were used to determine technological eligibility and the judge concluded that the Appellant’s activities constituted SR&ED and they were therefore entitled to costs.
Notably, while this case fell within the mechanical engineering industry it ended up being eligible for SR&ED because it ran into a type of uncertainty most commonly encountered in the software engineering industry which is known as “system uncertainty”. The judge noted that while “any one of the features of the final [tractor] design may have been known, it is the innovative combination and alignment of these factors which made this project unique”. The Appellant encountered system uncertainty during the development of their tractors which they then sought to resolve following the process outlined in the five questions.
Tax Cases: Technical Details – 1 Win & 6 Losses
Next, David Sabina, Director of MEUK Corporation, discussed the technical details of the remaining seven tax cases including one win, and six losses.
David first discussed the case of Canafric Inc. v. The King (2023). In this case, the Appellant was a food manufacturing business specializing in developing frozen pies. The Appellant carried on various projects and activities aimed at developing new or advancing pre-existing products in which they had to balance “health” and “taste” requirements. The Appellant sought to reduce salt and fat contents in its products, while maintaining good taste. According to the Appellants expert witness, even if the ultimate goal was the same, the nature of this challenge varied from one product to the other because different ingredients do not interact the same way with fat and salt. Based upon the Appellant’s evidence, which the Judge stated was “most compelling and met the burden put forth upon them by the pleadings“, the Appellant was able to successfully establish that the SR&ED Claims in question met all five criteria established in Northwest Hydraulics.
Next, David presented the six legal ruling that were ruled as losses. He examined Anne-Marie Chagnon Inc. v. The King (2023), Dave’s Diesel Inc. v. The Queen (2022), Gestion ACBK Inc. v. The King (2022), JEC Distributors Inc. v. The King (2022), Mold Leaders Inc. v. The King (2023), and 9158-1629 Quebec Inc. v. The King (2022). The technological eligibility of all these cases were analyzed using the five questions from Justice Bowman in Northwest Hydraulics and the Appellant’s, in all cases, were unable to prove they had identified a technological uncertainty and sought to reduce or eliminate that uncertainty through experimentation or analysis in all of their projects. Across all six projects the judges involved noted that standard or routine practices were used by the claimants.
To be eligible for SR&ED Investment Tax Credits (ITCs), work must be approached through a systematic investigation where hypotheses formed using the existing knowledge base are tested through experimentation and analysis and documentation is kept throughout the process.
SR&ED Tax Case Lessons
Next, Elizabeth Lance, SR&ED Education and Resources’ founder, presented the high level lessons learned from the tax cases discussed by David. The key lesson drawn pertained to the process length of tax court proceedings. From the fiscal year in which the related SR&ED costs are incurred to the year in which a final tax court ruling is made typically spans years, and SR&ED claimants preparing to go through the appeals process should be made aware of this before beginning. Legal proceedings can, and typically are, time consuming and long.
Next, the key themes of legal rulings were analyzed in an effort to highlight the issues typically noted within SR&ED legal proceedings. The theme noted most abundantly across all the cases was technological uncertainty. Ensuring the technological uncertainties within an SR&ED project are clearly defined is essential to prove the eligibility of said project. In addition, the analysis of the key themes highlighted that having high quality expert witnesses to support your claim, having adequate contemporaneous documentation, and understanding where the burden of proof lies during legal proceedings will all assist in making the legal proceedings go as smoothly as possible for claimants.
Elizabeth’s presentation highlighted the importance of clearly defining the technological uncertainties in your work. Poorly defined uncertainties alert the CRA that your work may not have been SR&ED eligible, and they will most likely pull these projects for review. Taxpayers should consider whether their work meets the 5 questions set forth in Northwest Hydraulics before submitting their SR&ED claim as these questions remain the standard method within the tax courts to determine the eligibility of the work performed. Please see our article “The 5 Questions For SR&ED – Intent and Evolution” for more information on the topic.
Issues Encountered in SR&ED for Medical and Dental Professional Corporations (MPCs & DPCs)
Next, the planning issues for SR&ED tax credit claims by Medical and Dental Professional Corporations (MPC’s & DPC’s) was discussed. This portion of the SR&ED Stakeholders meeting was presented by David Sabina. He first discussed the various MPC/DPC organization structures, and the sources of SR&ED funding available to these corporations, alternative financing plans (AFP) or alternative payment plans (APP) options, and the effects of those funding sources on SR&ED. The case of Andre Lamy Medicine Professional Corporation v. The Queen (2020) was used as an example to analyze the issues these types of corporations may experience. David also discussed the difference between wages and Third Party payments and offered his opinions and recommendations to MCPs and DPCs on how to most efficiently record their SR&ED work.
New Patent Incentives
The final topic was presented by Ben Mak, a patent lawyer. He discussed Patent and Intellectual Property (IP) related incentives linked to SR&ED. This section briefly touched on how patents can be utilized to show that technological advancements have been achieved, and then discussed in detail five patent based incentives available to corporations across Canada. The incentive programs he discussed included Quebec (IDCI) “patent box” incentives, EDC CanExport, IRAP IP Assist, IPON (IP Ontario), and Elevate IP.
Conclusion
This was an informative conference presented by a dynamic group of presenters. The topics covered were applicable to today’s SR&ED issues. If you missed the live 2023 SR&ED Stakeholders webcast, you can watch the replay or download the slides.