Feedlot Health – Tax Court of Canada finds that SR&ED proxy expenses can include costs of a third party which is not engaged in SR&ED

Where a taxpayer has elected to use the proxy (rather than traditional) method to compute additions to its pool of deductible SR&ED expenditures, the base expenditures claimable by it include (under s. 37(8)(a)(B)(II)) "an expenditure of a current nature in respect of the prosecution of scientific research and experimental development in Canada directly undertaken on behalf of the taxpayer." Woods J found that, in light of the broad meaning of "in respect of," this includes amounts paid to a third party, who is not engaged in SR&ED, for materials used in SR&ED that is being conducted by a third party for the taxpayer.

Accordingly, the taxpayer was allowed to recognize, for deduction and ITC purposes, the sums paid by it to a rancher (also a major shareholder) for the rancher’s costs of feeding cattle at feedlot operators, who also were being paid something extra by the taxpayer to follow an SR&ED testing protocol on those cattle, before they were slaughtered. This was so even though economically the amounts paid were mostly for beef production rather than the testing.

Neal Armstrong. Summary of Feedlot Health Management Services Ltd. v. The Queen, 2015 TCC 32, under s. 37(8)(a)(ii)(B).