A Tax Court of Canada Ruling on Shop Floor SR&ED (2014)

The October 2014 Tax Court of Canada (TCC) ruling from Les Abeilles service de conditionnement inc. v. The Queen may well have set a precedent for Scientific Research and Experimental Development (SR&ED) claim denial appeals.

Below, we’ve summarized the most important elements and key lessons to take away from the case. The full judgement is available, in French, on the TCC website.¹ We have provided an unofficial, unverified English translation of the ruling (using Google Translate) for ease of reference. This document is to be used at the readers’ own risk:

Les Abeilles service de conditionnement inc. – TCC Ruling (October 2014)

Les Abeilles service de conditionnement inc. v. The Queen

The Claimant/Appellant

Quebec-based company Les Abeilles service de conditionnement inc. (“The Appellant”) operated with a shop floor Research and Development (R&D) environment. They submitted a Scientific Research & Experimental Development (SR&ED) claim for six shop floor projects during the years of 2007 and 2009.² The projects related to the improved productivity of automated manufacturing processes for electrical appliance components.³

Note: Read our post for an explanation of various SR&ED environments, including shop floor environments.

The CRA’s Denial

Four of The Appellant’s claimed projects were denied by the Canada Revenue Agency (CRA) on the following grounds (emphasis added):

[…] the activities of the appellant did not have scientific uncertainty, they have not been carried out in a systematic investigation or search of science or technology and that they were only activities routine having no basic research, applied research and no any experimental development.⁴

Note that Section 2.1.1 of the CRA’s Eligibility of Work for SR&ED Investment Tax Credits Policy ⁵ defines technological or scientific uncertainties as issues that “cannot be resolved using the existing technology base or level and [require] experimental development to resolve the problem.”

Tax Court of Canada Ruling

Judge Gaston Jorré ruled in favour of The Appellant, arguing that the company’s four projects were guided by uncertainties in outcome and by a systematic approach, thereby making the projects eligible for the SR&ED tax credit:

When the appellant does not follow the normal production process, this is a “deviation” of normal production. There are three types of “deviations” in the appellant:

a) substitution,
b) modification engineering
c) experimental development⁶

[…] it is not mandatory that the work has led to technological progress; if the job fails, but also it is work undertaken in the interest of technological progress, the work can still be qualified⁷

[…] the appellant did not know how she was going to achieve its goals. Information on how to get there did not exist elsewhere.⁸

Implications of the TCC’s Ruling

This ruling has implications for SR&ED claimants wishing to refute a denial, and for program eligibility requirements in general:

1. Impartial Witness Evidence > CRA Doctrine

The courts decided that evidence given by The Appellant’s witness (Martin Gariepy) carried more weight because he drew from his own experience as a mathematician and an engineer.⁹ Conversely, the CRA’s Witness (Steven Kooi) was discredited by Judge Jorré for placing too great an emphasis on CRA policy:

In his testimony and in his report, there is confusion between its role as a scientific advisor during the audit and that as an expert witness.¹⁰

[…] during his testimony and his report, there are times when Mr. Kooi often seems to be guided by the guidelines and policies of the Canada Revenue Agency rather than by his personal expertise.¹¹

2. Refocusing the Definition of “Technological Advancement”

Judge Jorré ultimately ruled that The Appellant had in fact claimed SR&ED-eligible work, a conclusion arrived at by applying parameters used in Northwest Hydraulic Consultants Limited v. The Queen. The parameters place more importance on claimants carrying out systematic investigation to arrive at some advancement (though not necessarily groundbreaking), rather than focusing on the “routine” nature of the work.¹²

3. Viewing Projects as a Whole

Judge Jorré agreed with Mr. Gariepy’s assertion that Les Abeilles’ projects and product development tests should not be viewed in isolation, but as interrelated parts of a whole.¹³

This article is based on Tax Court of Canada (TCC) judgements available at the date of publication. Please consult the TCC website for the most recent versions of these judgements.

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