Willowglen – Tax Court of Canada finds that taking a percentage of mixed-use employees’ payroll qualified under the proxy method

The taxpayer engaged in an upgrading of a Supervisory Control and Data Acquisition (SCADA) system for the remote control of pipeline systems. In finding that the work did not qualify as SR&ED on the basis of not satisfying the test of there being sufficient technological risk or uncertainty, Wong J. stated:

The appellant’s efforts to develop a browser‑based system and move away from using a proprietary brand of hardware was more in the nature of catching up with a browser‑based external world and bringing an outdated system into the 21st century, i.e. product research and development. …

[T]here is no evidence that the appellant used more than routine engineering or standard procedures.

The taxpayer also worked on building a system for driverless trains that would run through a central box system, which the client wanted to operate at a Safety Integrity Level (SIL) of 4. In finding that this qualified as SR&ED, Wong J. stated:

Here, the cumulative uncertainties in creating a central train control box capable of operating at the SIL 4 level combined to form a system uncertainty … . The appellant had no guidance for building a control box capable of detecting zero speed and managing train‑line functions while also operating at the highest safety level.

In applying the proxy method under s. 37(8)(a)(ii)(B) in respect of the qualifying project, which references the payroll of employees engaged “directly” in SR&ED, the taxpayer included 100% of an employee’s remuneration where the employee's work contributed directly to SR&ED; whereas, if the employee's work was considered to be supporting in nature—for example, during a weekly project manager's meeting in which the project would be discussed along with other unrelated projects—the taxpayer applied a 60% factor to the remuneration.

Wong J. found that she could not agree with the Crown's contention that applying a mathematical factor of 0.6 was unreasonable in the circumstances.

Neal Armstrong. Summaries of Willowglen Systems Inc. v. The King, 2026 TCC 7 under s. 248(1) – SR&ED and s. 37(8)(a)(ii)(B).