Airzone – Tax Court of Canada indicates a presumption that a taxpayer satisfying the “how” SR&ED tests will also satisfy the “why” test

The taxpayer (“Airzone”) provided comprehensive air quality monitoring services to government agencies, international organizations, and businesses. In connection with allowing most of Airzone’s projects, largely in connection with expanding its techniques for testing for airborne compounds, as qualifying as SR&ED, Hogan J made a number of pithy general observations, including:

• The taxpayer is required to demonstrate satisfaction both of “how factors,” namely “that the work was carried out by way of systematic investigation or search through experiment and analysis of a hypothesis … [and the] results of the work must also be preserved” and also a “why factor,” namely “that the work was carried out to resolve technical uncertainties that could not be solved through standard procedures and methods.”
• “[T]he concept of ‘experimental development’ includes activities undertaken to achieve incremental improvements to existing methods or procedures” e.g., in this context “improving methods, procedures and processes to carry out air quality detection in unique environments.”
• “[I]t is unlikely that a taxpayer would conduct experiments in a manner that respects the “how factors”, all at additional expense, if the purpose of the work was not to achieve technological advancement.”
• Technical uncertainty can be considered to be present where “the claimant may be fairly confident that the goals can be achieved, but it is uncertain which of several alternatives will work.”
• “[T]he ‘why factor’ cannot be so strictly applied that only large corporations that employ dedicated research staff can qualify for the SR&ED incentives … [as m]oving the goal post so far afield … would be contrary to the intention of Parliament.”

Interestingly, the taxpayer called the CRA research and technology advisor, who had carried out the audit of the challenged projects, as a witness in order to cross-examine him to demonstrate that his sources “were not of particular relevance” and that “his knowledge of Airzone’s specialized field of activity [was] understandably quite limited.”

Neal Armstrong. Summaries of Airzone One Ltd. v. The Queen, 2022 TCC 29 under s. 248(1) - SR&ED and General Concepts - Evidence.