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SR&ED Updates Q2 2017 (April to June)

SR&ED Knowledge and News SR&ED Updates Q2 2017 (April to June)

What happened with SR&ED in the second quarter (April to June) in 2017? Here, we discuss the updates.


There has been a lot more happening on the SR&ED front in this quarter than in the previous one (see our post on Q1 updates). There were two Tax Court of Canada rulings on the subject, and there’s been a fair bit of chatter about SR&ED in the media, particularly in the month of June. This update will look at these articles for the first time, and go into greater detail about the Tax Court rulings.

CRA Policy and Administrative Updates

No major updates were made, aside from slight modifications to the definitions of the terms “humanities” and “social sciences” in the CRA’s SR&ED Glossary.

Relevant Judicial Proceedings

Over the quarter there have been several new Tax Court of Canada rulings which relate to the SR&ED tax credit program.

Rio Tinto Alcan Inc. c. La Reine (2017-04-26)

This ruling, made in French by the CRA for Rio Tinto Alcan (the Appellant), centres around assessments from the 2006 taxation year, and the years ending on October 31, 2007, and December 31, 2007,

The Appellant is one of the co-owners of Aluminerie Alouette Inc. (AAI), which was established in 1989 to manage and operate aluminum production in Sept-Îles, Quebec. During the disputed years the Appellant claimed the deduction of expenses in respect of its own SR&ED expenditures. The Appellant, as co-owner of AAI, also claimed its share of SR&ED and ITC expenditures related to the research activities undertaken by AAI for 2006 and 2007.

At the time of reassessment, the owners of AAI fell under the jurisdiction of the Montreal CRA office. However, as AAI also fell within the jurisdiction of the Quebec City office, it was that office that had to determine whether the SR&ED activities undertaken by AAI were SR&ED-eligible within the meaning of the definition in section 248 of the Income Tax Act. That is, whether the work was a “systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis”1 and that is:

  • basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

  • applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

  • experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto. 2

The Appellant claimed that the auditor arbitrarily denied the company’s SR&ED expenditures and AAI ITCs (Income Tax Credits) because no assessment or assessment process had been initiated by the Quebec City office. Though the Court had ruled against this notion, the Appellant still felt that the assessor could not argue they knew the reassessment had been initiated. The Appellant also argued against a perception at the CRA that AAI was not cooperating with the CRA’s reassessment process because there was no evidence to suggest this. In fact, the Appellant argued, the assessor had no knowledge of AII’s SR&ED activities at all, meaning that there was no factual basis for the reassessment.

According to the Appellant, a taxpayer should be entitled to know the basis of an assessment; that is, the facts as to why the CRA is reassessing a claim. The Appellant argued that the reassessments should be reassessed so that the SR&ED expenditures and AAI’s ITCs claimed by the Appellant would be granted.

The tax assessor was of the opinion that the work the Appellant had prepared was in accordance with the law, and the CRA had denied the share of the SR&ED expenditures and the AAI ITCs claimed by the Appellant. The assessor indicated that reassessments would be made in respect of the Appellant’s own SR&ED expenses as soon as the reassessment by the Quebec City office for the years 2006 and 2007 had been completed.

The reasonings for the judge’s decision are based on section 152(1) of the Income Tax Act around the rights of a taxpayer to an assessment 3 (which the Appellant had claimed the CRA did not do, but should have done). In the end, the judge sided with the CRA and ruled against the Appellant, finding the reassessments to be valid. The Appellant’s arguments seemed paper-thin, so this should be a lesson learned about fighting the government without much in the way of evidence. 4

AG Shield Canada Ltd. v. the Queen (2017-04-27)

This was an appeal made in the taxation year ending on December 31, 2010 under an Income Tax Act reassessment for AG Shield Canada Ltd. (AGSC) (the Appellant). The judgement relates to wages and dividends claimed by two employees for SR&ED work they performed.

AG Shield Canada Ltd. (AGSC) had researched, manufactured and designed agriculture implements since 1984 and had been claiming an SR&ED tax credit for this work since 1993. Tom McCrea and his brother, Gary McCrea, each own 50 percent of the shares of AGSC and are its only officers and directors. In 2010, AGSC claimed eight projects that involved SR&ED. Tom McCrea worked 3,000 hours in 2010, of which 1094.5 hours were spent on SR&ED activities, and Gary McCrea worked the same number of hours, of which 201.5 hours were spent on SR&ED activities.

The McCreas were paid dividends of $62,400 in the 2010 taxation year (as 50 percent shareholders, Tom McCrea and Gary McCrea each received $31,200). On top of that, Tom McCrea received $26,940 of salary and wages, and Gary McCrea received $11,940 of salary and wages. The McCreas claimed only the number of hours they had worked on SR&ED at those salaries in their tax filing, being paid $30/hour – not the dividends or any extra time not spent on SR&ED activities.

The Queen (in this case, the CRA’s) position was that the salary and wages being claimed related to all of the work that Tom McCrea and Gary McCrea performed for AGSC, since they were paid extra money for the other work in the form of dividends. The court, however, found that the non-SR&ED work was paid in the form of the dividends. The CRA argued that a ruling for the McCreas would go against a previous court case, Ergorecherche et Conseils Inc. v. The Queen, but the Court found that, in the Ergorecherche case, “the salaries paid to the two shareholders were based not on the hours they worked, but solely on the appellant’s liquid assets at the end of the year.” The court, however, ultimately ruled in the favour of the McCreas.

This case clarifies that you can claim the SR&ED tax credit based on the actual hours in which SR&ED work was performed on a project, not work performed during the entirety of an SR&ED project, including unrelated management and administration. This should be beneficial for other small businesses who are making their claims based on work hours. 5

SR&ED Updates in the News

More science, please, but hold the bureaucracy … (The Globe and Mail, April 11, 2017)

The Globe and Mail have been, in recent years, very critical of the SR&ED program, and this think-piece from Barrie McKenna is further proof. He writes, “Ottawa has since cut about $500 million from its flagship multibillion-dollar Scientific Research and Experimental Development program by tightening eligibility. But it hasn’t put any significant new money into research, and there has been no consolidation of programs. And now, the Liberals are starting all over again. The government is reviewing the National Research Council, the SR&ED program and science policy. The tragedy is that all this tinkering isn’t working. Canada has been slipping behind other advanced countries on many of the key metrics of innovation.”

A strategy that will make Canadian innovation flourish (The Globe and Mail, June 2, 2017)

Wal Van Leirop is President and CEO at Chrysalix Venture Capital, and he wrote an opinion column in the Globe and Mail that mentions SR&ED in passing, and not positively. “The dissonance between our strategic interests and use of capital has created a big-city ‘bubble’ in Canada’s tech sector. While we have winners from time to time, we struggle to sustain Nortels and BlackBerries for the long haul. The few ‘successes’ we do have are small and sold to U.S. owners. Along that path to a U.S. buyout, we subsidize thousands of small companies with SR&ED tax deductions and similar programs. … Wouldn’t it make sense to prune actively and only strengthen startups that have good odds and the highest potential value for Canada? One company scaled up can produce far more jobs and opportunities than dozens of small startups combined. Canada needs to produce Googles and Facebooks in the industrial sector.”

It should go without saying that Van Leirop fails to mention that Googles and Facebooks can be produced from SR&ED tax credits if they are doing truly groundbreaking work.

A better way for the government to help ‘pick’ tech winners (The Globe and Mail, June 7, 2017)

Once again, the Globe and Mail has written a critical thinkpiece about the SR&ED program — with emphasis on the word “critical”. “Recently, the federal government unveiled the new supercluster program to the tune of $950-million toward 5G networks, clean tech, self-driving cars and more. The thinking behind this was straightforward – the government should choose and support the development of specific technologies where Canada can win globally. Contrast this thinking with the $4-billion Scientific Research and Experimental Development Tax Incentive Program (SR&ED) that supports almost any small company that is willing to invest in new technology development, regardless of a proven market need or path to market.”

While the article does not recommend getting rid of the SR&ED program, it suggests that it needs to change to decrease the amount of “grind down” a small company faces as it grows.

“If you are unfamiliar with the term “grind down,” it refers to a mechanism in the SR&ED program that decreases the cash returned to companies as they grow or become mildly profitable,” the article notes. “The original idea was to spark innovation and startups, but looking at the stats we don’t have an innovation problem – we have a commercialization of innovation problem. Perhaps we should be redirecting some (but not all) of that funding to mid-market winners with proven track records that are reinvesting in R&D rather than endless startups. Not only do these mid-market companies have proven business plans with proven paths to export markets, the increased exports shift the balance of trade and bring foreign money into the country to help further pay for the program.”

Once again, the article overlooks a key fact. SR&ED is beneficial to all companies, not just start-ups.

Vancouver electric carmaker delivers first vehicle (Business in Vancouver, June 27, 2017)

There is a mention to SR&ED towards the end of this piece about an electric vehicle (EV) manufacturer, and it is not very flattering: “The province offers two tax credits that could benefit firms involved in research and development for EVs: the scientific research and experimental development (SR&ED) tax credit and the small-business venture capital tax credit program.

However, the federal version of SR&ED does not offer targeted tax credits to businesses working in EVs.”

Once more, the article fails to mention that the SR&ED program offers tax credits to any company that is applying research to new products that solve a technological uncertainty. Electric vehicles have been around for some time now, so simply manufacturing an EV is not new or noteworthy.

Canadian startups are being left behind their U.S. competitors by outdated LP rules (Financial Post, June 29, 2017)

The SR&ED program gets a brief mention in this article in its penultimate paragraph: “A further limitation of a (limited partnership or) LP structure is that SR&ED tax incentives, which many early-stage businesses rely on as a lifeline, are often not available to LPs. Thus, there may be a trade-off between the prospects for investment capital and access to SR&ED funding.”

Again, the media is bemoaning the state of the tax credit system and its limitations, and the article compares our tax system to the more favourable tax system of the U.S.

Summary of Q2 Updates

As you can see, the media has been quite critical of the SR&ED program lately, and one wonders if the negativity is due to being told that the program is bad by a source that they then champion around. Remember, not all things that the government is involved in are bad or controversial.

The Tax Court of Canada rulings are interesting in that they show that you can, sometimes, win against the CRA, but only if you have really documented your case.

It’ll be intriguing to see what the summer months bring in the form of SR&ED news and updates.


Find more news summaries on our SR&ED in the Media page.
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Show 5 footnotes

  1. Government of Canada. Justice Laws Website. (July 1, 2017.) Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)). Retrieved from:
  2. Government of Canada. Justice Laws Website. (July 1, 2017.) Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)). Retrieved from:
  3. Government of Canada. Justice Laws Website. (July 1, 2017.) Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)). Retrieved from:
  4. Jugements de la Cour canadienne de l’impôt. (April 26, 2017.) Rio Tinto Alcan Inc. c. La Reine. Retrieved from:
  5. Tax Court of Canada Judgments. (April 27, 2017.) AG Shield Ltd. v. The Queen. Retrieved from:

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