CS Communication – Court of Quebec finds that that expenditures under an agreement to develop software for a 3rd party pursuant to its specifications qualified for SR&ED ITCs

A software development company (CS Canada) entered into an agreement with Pratt & Whitney for the sale to of aeronautical control system software. The ARQ accepted that various salary expenses of CS Canada (of about $0.9M per annum) were incurred on the prosecution of SR&ED, but denied investment tax credits on the basis that the contractual consideration paid by P&W constituted “contract payments” under the Quebec equivalent of the definition of that term in ITA s. 127(9), i.e., on that basis that the SR&ED was performed on behalf of P&W.

In finding that such payments were not contract payments, so that CS Canada was entitled to its claimed ITCs, Riverin JCQ noted that subject matter of the contract was a sale of system control software (required to meet the detailed specifications of P&W) and not the performance of SR&ED, and that CS Canada bore all the risk (it paid all the development costs in consideration for a largely fixed contract price), and retained ownership of the intellectual property developed by it in performing the development work (although it licensed that IP to P&W).

Neal Armstrong. Summary of CS Communication v. Agence du revenu du Québec, 2022 QCCQ 1175 under s. 127(9) – contract payment - (a).