The taxpayer acknowledged that the work performed by it for which it claimed investment tax credits did not follow the scientific method as described in Northwest Hydraulics, but argued (at para. 6) that “there was no reference to ‘scientific method’ in the text of the definition [of SR&ED]” and, therefore, that requirement should not have been applied to it. In rejecting this submission, Webb JA stated (at para. 8):
Kam-Press did not address any … decisions of this Court [endorsing the criteria set out in Northwest Hydraulics] or provide any basis upon which these cases should not be followed. There is no basis to overturn Northwest Hydraulics or the decisions of this Court that have adopted the approach to be followed, as set out therein, to determine if a particular project or activity qualifies as SR&ED. …
Jentel Manufacturing Ltd. v. Canada, 2012 DTC 5031 [at 6682], 2011 FCA 355
The taxpayer, a producer of plastic containers, undertook a project to "improve the existing product to make it a smaller and significantly lighter storage system" (para. 9 of Statement of Appeal, quoted at para. 5). The Court agreed with the trial judge that the taxpayer's methods, which included changing the type and thickness of plastic used, changing the moulds and the casting materials, and using different types of material for the stand, did not entail "technological risk or uncertainty which could not be removed by routine engineering or procedures" (para. 6).
The taxpayer's argument that there was "no process in existence that could create moulded plastic items with the shapes, features and capabilities sought" was not persuasive. Evans J.A. stated (at para. 10):
Jentel acknowledges that a major part of the manufacturing technology puzzle was pre-existing. ... This recognition that thermoforming and injection moulding techniques and procedures were pre-existing (and therefore accessible to other professionals in the field), coupled with the fact that Jentel had previously used both methods and did not suddenly begin to use them in the 2005 fiscal year, supports the reasonableness of the judge's conclusion that Jentel was using an available, standard manufacturing process.
The taxpayer's SR&ED credits were therefore denied.
Blue Wave Seafoods Inc. v. Canada, 2006 DTC 6155, 2006 FCA 81
The Tax Court judge had committed no reviewable error in finding that in the last two taxation years under review, there was no longer any remaining scientific or technological uncertainty being addressed by the taxpayer in developing a commercial silver hake operation, so that related expenditures for those years did not qualify as SR&ED.
R I S - Christie Ltd. v. Canada, 99 DTC 5087 (FCA)
The taxpayer was entitled to have its expenditures treated as SR&ED notwithstanding the absence of documentary evidence relating to the repeatability of the testing data.
The taxpayer constructed a house intended to be uniquely energy efficient while staying within the price range of a “regular home”. It was designed to be a “passive house”, integrating various natural force interactions into one passive building product not requiring grid-tied energy sources. SR&ED claims based on various procedures followed to harness natural force interactions, such as thermal mass, thermal bridging, passive cross-ventilation, passive heating and cooling, and air sealing, were denied by the Minister.
In dismissing the appeal, Russell J applied the five-step approach in Northwest Hydraulic for identifying whether SR&ED had been conducted, and found that none of the five steps were satisfied: there was no new technology or “technological risk or uncertainty which could not be removed by routine engineering or standard procedures” (paras 25, 26, and 27); the stated hypothesis was aimed at cost reduction, not “specifically aimed at . . . technological uncertainty” (para 31); there was no “procedure adopted [to] accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses (para 34); there was no “process result[ing] in a technological advancement”; and “there was no detailed compilation of hypotheses testing results, kept as the work progressed (para 36).”
Russell J stated (at paras 29, 30 and 33):
The Appellant’s position however is that keeping the construction cost, of a house so energy efficient it does not require a furnace, to a level equating with the construction cost of a house built to regular code standards is itself a technological advance.
I disagree. Conceptually there is no technological aspect implicit in the notion of an item costing or priced at ‘x’ rather than ‘y’ dollars. …
Conceivably, uniquely combining several known procedures that result in rendering a process more efficient might constitute SR&ED. However, that would only be so if the unique combination is itself accomplished through application of the scientific method contemplated by Northwest Hydraulic. …
WRD Borger Construction Ltd. v. The Queen, 2021 TCC 40 (Informal Procedure)
The taxpayer’s business included installing water mains and culverts in housing subdivisions. A particular project which it treated as SR&ED was seeking to instal and tie-in new box culverts with existing box culverts that, in turn, hooked into a catchment pond 4 meters below the water surface. Ultimately (after trying out various approaches, including using a water filled inflatable bladder dam), the taxpayer used a combination of a concrete cap, small objects such as pieces of wood, and pumps to dewater the square culvert (so that its workers could work inside it and instal the necessary tie-ins).
In confirming the disallowance of the taxpayer’s SR&ED claims, Wong J stated:
 I do not believe that the appellant’s activities meet the five SRED criteria. I would describe the appellant’s efforts as resourceful in light of the time and monetary constraints before it, but they were not innovative.
 … I would consider the use of physical objects and pumps in this manner to be within the scope of their standard usages.
 The appellant’s approach to this situation was more akin to problem-solving by trial and error than formulating hypotheses and systematically testing them to reduce or eliminate a technological uncertainty. …
 The fact that the appellant’s recordkeeping was limited to time cards and daily field observations entered into its routine monitoring system, supports the conclusion that the appellant was not engaged in experimental development to achieve technological advancement by creating something new or improving something already in existence. It was unnecessary to track progress as one would in a scientific experiment because there was no hypothesis.
 … [T]here was no advancement in the field of civil engineering for the purposes of the SRED provisions.
The taxpayer was an information technology company that undertook development of dual-purpose shingle sized solar panels that would be indistinguishable at street level from asphalt shingles. In finding that the taxpayer’s work did not qualify as SR&ED, Monaghan J indicated that:
- she was “not convinced the Appellant had adequate information about the state of relevant knowledge in the field to assess whether there was a technological uncertainty” (para. 76)..
- solutions identified by the taxpayer to identified challenges, e.g., adding an air gap beneath the shingles to avoid over-heating, and adding support to deal with snow weight issues, appeared “to be the application of routine engineering” (para. 89).
- the taxpayer’s test results summary pages lacked significant details of the tests’ purposes, the observations made and conclusions drawn.
- furthermore, the “jurisprudence indicates that the documentation should be contemporaneous” whereas here it seemed likely that “the schematics and test descriptions the Appellant provided were … prepared.. when the CRA asked the Appellant for supporting documentation,” and similarly for testing summaries (para. 139).
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|Tax Topics - General Concepts - Evidence||individual did not qualify as a participant expert||128|
The taxpayer provided a software platform to its clients to allow them to communicate remotely with their workers through wireless handheld devices used to access their employer’s computer system, in a great variety of applications. Different third parties provided the software for different models of the hand-held devices. This resulted in inconsistency in the operation of one model compared with another model. The taxpayer’s platform was built to accommodate the different idiosyncrasies and frequent updates of the various hand-held devices. The taxpayer had to experiment and test to find out what it could do to get all of the software components to execute in the manner the taxpayer required in order for the hand-held (or another one of its devices) to provide the service the taxpayer’s client required.
In finding that three of the taxpayer’s projects qualified as SR&ED, so that they generated investment tax credits, D’Arcy J:
- reiterated the tests adopted in C.W. Agencies,
- found (at para. 194) that the taxpayer “was attempting to develop a new product (its platform) that would work seamlessly with a multitude of devices that used different operating software and ran on the various operating systems of [its] clients” and similarly (at para. 202) that the work undertaken by the taxpayer was "for the purpose of achieving technological advancements that would allow [it] to create a new and/or better product”
- found that the project had various challenging elements and that these challenges could not be resolved with routine engineering, so that it was instead required to experiment to come up with hypotheses of things that it could test
- also noted (at para. 209) the projects “were the same or similar to projects in respect of which the Appellant received grants from the National Research Council of Canada”
Before allowing the appeal, he stated (at para. 208)
… I have concluded that when the Appellant conducted the projects at issue, it formulated hypotheses specifically aimed at reducing the identified technological uncertainty, followed appropriate procedures on testing, including the formulation, testing, and modification of hypotheses, and maintained a detailed record of the hypotheses tested and results achieved as the work progressed.
The taxpayer (“National”), which provided consulting services to clients, claimed to have made SR&ED expenditures of $68,029 and generated investment tax credits of $23,810 in connection with developing a computer program that would automate aspects filing SR&ED claims with the CRA through a web-based, cross-platform and cross-browser framework to track claimable SR&ED projects.
In confirming the CRA’s denial of National’s claims, Lafleur J found that the objectives (including “develop[ing] a mechanism for in-memory array initialization of joint record sets such as ‘pivot-like output’” satisfied the test of technological uncertainty, Lafleur J found that other tests were not satisfied, including “that National did not carry out systematic investigation to remove technological uncertainties” (para. 64) and there was no “contemporaneous documentation that details any of the tests and the results of those tests” (para. 72).
The taxpayer (BMQ) used mobile concrete mixers to provide concrete at the site of construction or major repair projects. The following projects were found not to qualify as SR&ED given inter alia an insufficiency of technological uncertainty:
- Accommodating a BMQ customer wishing to use a 15% latex concrete mix containing fast-setting cement and installing an oil-based membrane after a maximum drying time of 36 hours.
- Three projects for addressing issues arising from changing the supplier of ternary cement.
- An attempt to increase the compressive strengths of BMQ’s standard concrete mixtures by replacing the existing superplasticizer admixture with the new-generation admixture (purchased from a supplier).
- Experimentation with a porous concrete mixture (already known in the industry) that was intended to slow the rate of discharge of rainwater into sewers.
- Testing by BMQ to verify whether its concrete mixes complied with a new CSA standard imposing a maximum level of permeability for chlorine ions.
- Addressing an issue of the inputs in another mixture that had been developed becoming segregated.
However, the following projects were found to qualify:
- An unsuccessful attempt by BMQ to develop a lightweight self-compacting mortar for mobile concrete mixers (similar to an existing product for conventional concrete mixers) (Lafleur J stating, at para. 227, Tax Interpretations translation, that “Mr. Dubé systematically studied the problem raised by the low percentage of air in the mixtures tested and experimented to determine the causes of these results”).
- A largely successful project to achieve a mix with a compressive strength greater than 10 megapascals after 24 hours, while maintaining the other properties of self-compacting concrete (Lafleur J stating, para. 272, that “BMQ incorporated into a product - self-compacting concrete - a rapid-setting feature, that was not readily available in standard practice, thus improving the product in question”).
- A successful project arising from a customer request for a rapidly-setting cement-based mortar mix to be used to seal underwater rock used in a bridge pier (Lafleur J stating, para. 272, that “although BMQ used current technological knowledge or current practices in this project to create the new product, BMQ could not predict whether the objectives could be achieved, or at least, BMQ could be fairly confident that they could be achieved, but without knowing with certainty which solution would be applicable” and, at para. 297 “the scientific progress in this case consisted in advancing BMQ's knowledge of the various dosages and properties of the inputs used.”)
- The development for another client of a rapidly-setting concrete mixture for road repairs.
- An unsuccessful attempt to use rapid-setting latex concrete as a wearing surface when used a repair product, e.g., on a bridge.
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|Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(B) - Subclause (8)(a)(ii)(B)(IV)||managerial and supervisory payroll included||256|
Clevor Technologies Inc. v. The Queen, 2019 TCC 166 (Informal Procedure)
The taxpayer’s software, which determined the optimal timing and sequencing of steps for large construction or mining projects, ceased to work properly with project management software of a large software company (Oracle) after Oracle made poorly documented changes to its code.
The taxpayer’s systematic process of trying different combinations of coding changes to its software to eliminate these integration problems was characterized by Russell J (at para. 17) as a “trial and error” procedure that was “routine engineering” and not SR&ED.
Russell J also accepted the view of the Crown’s expert that a second mooted “SR&ED” effort to enhance the ability of the taxpayer’s software to calculate optimal timelines for concurrently run projects used an established methodology termed "metaheuristics, which in essence search the solution space based on some algorithms and converge to a solution” (para. 22), and that “while the work was complex and time consuming, requiring algorithm refining, coding and testing to obtain an acceptable solution, the work did not involve experimentation or analyses to resolve scientific or technological unknowns” (para. 24) so that for this activity as well, the claimed SR&ED credits were denied.
A participant in the Hibernia joint venture, treated its share of the costs of the initial well in one of the oil reservoirs (which was expected to shed light on where the boundary was between the water sitting at the bottom of the reservoir and the oil atop it) as SR&ED on the grounds that it provided experimental validation of the predictions made using an improved systematic and logical methodology (the “reservoir connectivity analysis,” or “RCA”) for evaluating how a reservoir is connected.
In rejecting this position and confirming the denial of the claim after reviewing the general jurisprudential test as to what constituted SR&ED, Owen J stated (at paras. 68-69):
[C]ommon sense and commercial reality dictate that the primary purpose of any such well (even the first one) is not to validate the RCA methodology but rather to obtain data regarding oil in the southern extension. …
The drilling of a conventional well, based on the predicted location of oil, to establish whether and to what extent oil is present may be distinguished from the construction of a pilot plant to test a new or improved process or technology. The latter contributes to the resolution of technological uncertainty associated with the construction of a full scale plant while the former incidentally provides data that either agrees with or disagrees with the outcome predicted by the model.
Turning to paras. (d) and (f), he stated (at para. 71):
The exclusion in paragraph (h) means that work with respect to data collection that is commensurate with and in support of basic research, applied research or experimental development does not include such work that constitutes prospecting, exploring or drilling for petroleum. In this case, well B16-54 was drilled to obtain data regarding the petroleum present in the Hibernia southern extension. Accordingly, the drilling of the well is excluded … .
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|Tax Topics - Income Tax Regulations - Regulation 1204 - Subsection 1204(3) - Paragraph 1204(3)(a)||income not derived from transporting if no actual revenues therefrom||378|
CRL Engineering Ltd. v. The Queen, 2019 TCC 65 (Informal Procedure)
The taxpayer, which was an engineering firm specializing in developing public transit related technology, engaged in a project to develop its web‑based system using algorithms and GPS data to provide accurate real‑time data for predicting the arrival time of public transit buses.
In finding that the taxpayer satisfied the five-factor test in Northwest Hydraulic Smith J stated (at paras 19, 21, 22, 25, 27, 28):
[T]he objectives which the Appellants sought to achieve were sufficiently uncertain during the subject years. … [T]he Appellant’s Project was much more than “quality control or routine testing (…)” excluded by paragraph (f) of the Act, and … there was a “technological risk or uncertainty”.
The Appellant described what it called its “over-arching hypothesis” as whether “autonomous distributed computing systems based on general purposes computing units [can] be effectively deployed in order to provide accurate real‑time status information to both users and administrators in a real world transit system”. …
[T]he Appellant had a “logical plan devised to observe and resolve the hypothetical problem” and that, as such, this criterion is satisfied.
I … find that Appellant applied the scientific method and that its activities were structured to remove a technological uncertainty through the formulation and testing of its hypothesis.
… [P]aragraph (d) of the definition of SRED includes “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”. (My emphasis.)
There is necessarily a fine line between a “technological advancement” or “incremental improvements” to existing materials, devices, products or processes. This suggests that the Appellant need not prove that its activities were novel, but rather that there were incremental improvements to existing technology.
Concept Danat Inc. v. The Queen, 2019 TCC 32 (Informal Procedure)
The taxpayer, whose business was to embroider or imprint publicizing lettering on clothing engaged in three projects, none of which were found by Lafleur J to qualify as SR&ED. The third project, for example, sought to determine the temperature that would permit the making of impressions on fabrics through the technique of sublimation without destroying the fibre and at the same time allowing for the penetration of colour to the base of the fabric. In finding that this project did not qualify, she stated (at para.52):
…Danat has not satisfied me that there was any technological uncertainty in this project. It used different combinations of the settings available and provided by its equipment: different amounts of ink, different pressures, different temperatures and different pressing times. The evidence did not demonstrate that Danat sought to go beyond the operating settings of its equipment. Similarly, I am not of the opinion that there was any advancement in the technology; in fact, this Court previously ruled that the newness of a product is not sufficient for demonstrating a technological advancement (Zeuter …).
Earlier in her reasons, Lafleur J stated (at para. 31) that CRA’s guidelines on what constituted SR&ED in Eligibility of Work for SR&ED Investment Tax Credits Policy were “useful and reliable.”
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|Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) - Paragraph 37(1)(a) - Subparagraph 37(1)(a)(i)||SR&ED claim could not be based on estimated hours worked||141|
Mac & Mac Hydrodemolition v. The Queen, 2017 TCC 256 (Informal Procedure)
The taxpayer (“Mac & Mac”) was approached by a potential client to use its expertise in hydrodemolition to develop a technique to remove the worn inner linings or, failing that, both the inner and outer linings, of large metal pipes that had been used in transporting bitumen, so that the necessity of replacing the pipes would be eliminated. Mac & Mac used numerous different approaches to applying high-pressure water to this end, and changed only one variable with each test.
In denying the taxpayer’s SR&ED claims, Graham J stated (at paras 7, 8, 9 and 10):
Mac & Mac’s claims … do not meet the last test [in Northwest Hydraulic.] That test requires Mac & Mac to have kept detailed records of hypotheses, tests and results as the work progressed.
Mac & Mac kept a set of handwritten notes. … There is simply no way that someone, even someone very experienced in the industry, could hope to replicate or confirm Mac & Mac’s results from these notes.
A spreadsheet … provided more detail than the notes. However, it was prepared after the fact for the purpose of supporting the SR&ED claim and still did not contain the level of detail I would have expected. …
As noted … in Highweb & Page Group Inc. v. The Queen:
. . .While evidence of the outcome is important, … [s]ince a negative answer to the hypothesis is a more frequent outcome and frequently as helpful in advancing technological knowledge, detailed step-by-step logging, analysis, and measurement is a mandatory requirement, not an optional addendum. …
Life Choice Ltd. v. The Queen, 2017 TCC 21 (Informal Procedure)
The taxpayer was a natural health product company. Its alleged SR&ED consisted of reviewing the literature and consulting other researchers in order to devise three new naturopathic formulations. It described its final testing as submitting its formulations to Health Canada for approval which, once obtained, caused it to deem its formulations to be effective.
In dismissing the appeal, Boyle J stated (at paras 49-50):
[A] newly hypothesized formulation cannot on its own be considered either knowledge or the advancement of knowledge for these purposes.
It is the absolute absence of testing of the natural health products by Life Choice after their formulations were hypothesized by Dr. Dahl that is fatal to this appeal. …
Boyle J further stated (at para 53):
My decision in this case is in no way intended to suggest that literature reviews and consultations with other researchers cannot be qualifying activities giving rise to qualifying expenses as legitimate constituent parts of SR&ED activities. …
Flavor Net Inc. v. The Queen, 2017 TCC 179 (Informal Procedure)
Project 705 (the “Plant Sterols Beverage Project”) of the taxpayer, which carried on an energy drink business, sought to develop a beverage containing a mixture of 800 milligrams of plant sterols in a two-ounce format. This was more challenging than what Cargill had succeeded in doing, which was to disperse 400 milligrams in an eight-ounce serving. Project 806 (the “Partial Hot Fill System Project”) sought to develop a pasteurization system that focused on pasteurizing only the active ingredients by pumping these ingredients in a side kettle and then pumping back the mixture into a larger tank. The taxpayer’s related expenditures did not qualify as SR&ED.
D’Auray found that the taxpayer did not satisfy four of the five criteria in Northwest Hydraulic: it had has not established technological uncertainty since it was using methods and techniques that were available in the industry (para 44); there was no formulation of specific hypotheses related to technological risk or uncertainty (para 49); it was not clear that there was testing in accordance with the principles of the scientific method as it was not clear that the taxpayer used the results of its experimentation to modify its hypotheses with respect to the feasibility of its dispersion targets (para 54); and using known methods and products to attempt to disperse sterols in a smaller format did not constitute a technological advancement (para 57).
Project 806 also did not meet the requirements and, in addition, it was not clear that the Partial Hot Fill System was developed in the taxation years in question (para 67).
Robotx Solutions Inc. v. The Queen, 2017 TCC 73 (Informal Procedure)
The taxpayer was a corporation that improved customer’s equipment by increasing their lifespan, improving their security mechanisms or by standardizing them in order to produce economies of scale. In 2012, it entered into four separate contracts with four customers to provide them with specific solutions within the scope of this services business, and treated $182,483 of the expenditures which in incurred in the course of performing this customer-specific work as SR & ED expenditures.
Respecting the first project undertaken for an alcohol products company, Jorré J stated (at paras 50, 58, and 62-63, TaxInterpretations translation):
… [T]he purpose of the project was to make the palletizers and depalletizers [of beverage bottles] conform to current security standards and to eliminate the risk of the lifting platform falling when an operator or mechanic was underneath. …
… [T]here is nothing in the evidence that suggests that palletizers and depalletizers meeting the required safety standards do not already exist or that there is an improvement over what already existed . …
… Difficulties by themselves are not sufficient for their resolution to become experimental development.
Looking for technological advances in a process, I would expect that the novelty or improvement sought could be clearly and accurately described in relation to current processes. That is not the case here.
Jorré J similarly found that the second project, which entailed designing, making and installing a “flow rectifier plate” to straighten-out rectangular aluminum bars coming out of an extruder as part of the customer’s production process, did not meet the criteria for experimental development, stating (at para. 86):
There is no clear and detailed proof for each stage of the work that would lead to the conclusion that specific individual work, certain groups of work or all of the work was engaged in to resolve technological uncertainties that could not be resolved with current methods and existing knowledge.
Jorré J further found that the third project, to upgrade a municipal water treatment plant, did not require unusual methods (para 95), and the fourth project, to optimize the performance and safety of a milling machine, did not deal with technical uncertainties (para 106). Jorré J dismissed the appeal.
Formadrain Inc. v. The Queen, 2017 TCC 42 (Informal Procedure)
In also rejecting a submission that the taxpayer researched by “trial and error,” she noted that the taxpayer’s engineers analyzed the project’s technological challenges and specified in advance in their notebook the various trials to be conducted.
Accordingly, most of the taxpayer’s SR&ED claims were sustained.
Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen, 2017 TCC 6 (Informal Procedure)
The taxpayer (“JTR”) undertook a project in 2008 (the “Fire Curtain Project”) and in 2009 (the “Manual Override Project”) to solve two problems that it had encountered in its business of designing, manufacturing and installing theatrical rigging. The Fire Curtain Project successfully developed a technique for producing a controlled descent of a fire curtain without using counterweights (which consumed space.) The Manual Override Project successfully developed a technique for dealing with an issue in opening and closing curtains after there had been a power outage that eliminated the memory of a limit switch and, therefore, its ability to help control the movement of the curtain. Both projects were performed by employees with no science degrees or qualification as professional engineers, and involved trying out different combinations and configurations of standard equipment and devices to identify what could produce the desired result.
Sommerfeldt J found that this work was routine engineering and otherwise failed many of the tests enunciated in Northwest Hydraulic, so that it did not qualify as scientific research and experimental development. In the course of so finding, he stated (at para. 40) that “there are several cases which, while not saying so explicitly, suggest that trial and error may well fall outside the scientific method” and that the activities in the first project and the reconfiguring steps in the second project “seemed more in keeping with trial and error than with the scientific method” (at para. 42 re the Manual Override Project, similarly at para. 41 re the Fire Curtain Project).
He concluded (at para. 53):
JTR has failed to adduce sufficient evidence to establish that those activities did not constitute routine engineering, that there was technological uncertainty in respect of the Fire Curtain Project and the Manual Override Project, that the scientific method was followed, and that technological advancements were achieved in respect of each project.
Emotion Picture Studios Inc. v. The Queen, 2016 DTC 1005 [at 2519], 2015 TCC 323 (Informal Procedure)
The taxpayer was engaged in determining how on-page and off-page variables for websites interrelate to determine their Google (or other internet search engine) ranking and how to structure data to improve such ranking. In finding that this activity did not qualify as SR&ED, C Miller J stated (at para. 9) that “the experiments of submitting several different versions of websites to determine the significance of variables relies on existing technology in a routine manner,” and (at para. 10):
Here, the advancement would be the determination of algorithms that relate variables for purposes of ranking sites. … I fail to see how it is a scientific advancement to figure this out. It strikes me more of solving an equation someone has already solved, rather than coming up with a new proof.
ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2015 DTC 1212 [at 1366], 2015 TCC 263
The taxpayer had to adapt its existing system for implementing a nation-wide health information system in Belize given the severe telecommunications and internet connectivity issues there. In finding that this project satisfied the test of technological uncertainty, Campbell J stated (at para. 31):
The Appellant had no reasonable expectation of success with the Belize project unless new knowledge could be obtained. …[T]he Appellant developed a new approach by creating a multi-write database replication system.
Before finding (at para. 42) that the taxpayer "had identified the problems with the project, developed its objectives, formulated hypotheses and testing scenarios and modified or re‑developed its approach in response to the results it was obtaining," she noted (at para.39) that:
While it will always be preferable that an appellant maintain contemporaneous documents to support its systematic investigative procedures and methods…the Act contains no legislative requirement to file those documents in order to qualify… .
Accordingly, the related expenditures gave rise to investment tax credits.
Hypercube Inc. v. The Queen, 2015 DTC 1135 [at 859], 2015 TCC 65 (Informal Procedure)
Lamarre ACJ found that the taxpayer's development of code analysis software for websites was not experimental development. All problems encountered on the project were "resolved in the end by using recognized programming techniques to modify the program's code" (para. 46), and the team's alleged "trial and error" approach was really just ordinary debugging - for example, the program was initially only compatible with certain web browsers, it had a defect in the code that prevented it from working if used more than 150 times in one day, and it had initially not been designed to handle URL redirects correctly. As per Zeuter, mere novelty or innovation in software does not automatically elevate it to SR&ED (para. 47).
6379249 Canada Inc. v. The Queen, 2015 DTC 1109 [at 638], 2015 TCC 77
After developing and commercially launching a miniature portable printer, the taxpayer pulled the product in 2009 after identifying problems with curling paper and battery life. The taxpayer performed further work in 2009 and 2010 to remedy these defects (with partial success). The Minister characterized the work as routine engineering.
D'Auray J allowed the taxpayer's appeal. Paragraph (c) of the definition of "scientific research and experimental development" ends with "including incremental improvements thereto," and the French wording ("même légère, de ceux qui existent") makes it clear that experimental development includes "a slight improvement to materials, devices, products, or processes" (para. 100).
The further work included investigating the causes of the defects (which both turned out to be related to the anti-paper-curling mechanism), investigating and implementing a power-consumption curve in the printer's driver to avoid power-costly motor-stalling, finding new materials and surfacing methods in the anti-curling mechanism to make it more resistant to wear, and figuring out how to test paper at different moisture levels. D'Auray J disagreed with the Minister's "analytical approach" of applying the SR&ED tests to each of these activities individually - although, in any event, each individual activity passed those tests (para. 103). Although the taxpayer did not file any documents establishing its systematic investigation, this was established on the testimony of its chief researcher (paras. 92-3) (whose testimony that the required scientific report had been included with a form T661 filing was also accepted).
The taxpayer, a veterinary consulting firm, undertook four research projects to test new diets, supplements, and vaccines on cattle, and paid feedlot operators to perform these protocols. The 7000 cattle used in testing by the operators were, apart from the test protocols, raised for commercial production on behalf of their owners. The Minister disallowed scientific research and experimental development credits respecting over $1.6 million paid by the taxpayer to one of the farms ("Jim Farms"), for costs incurred by Jim Farms for the feeding the cattle, on the basis inter alia that Jim Farms was not engaged in SRED.
Before finding that the amounts paid to Jim Farms were "in respect of" the prosecution of research undertaken on the taxpayer's behalf within s. 37(8)(a)(ii)(B)(II), and that the work undertaken by Jim Farms was with respect to testing and data collection as per para. (d), Woods J found that Jim Farms' work was not SRED because it was performed "with respect to" the commercial use of a new process (i.e. the feeding protocols), as the cattle were at the same time exploited in his regular cattle business, and therefore was caught by the exclusion in para. (i) of the SR&ED definition, an exclusion which extended to work by third parties (para. 80).
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|Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(B)||work by proxy need not be "for" SRED - only "in respect of" it||320|
1726437 Ontario Inc. (AirMax Technologies) v. The Queen, 2013 DTC 1008 [at 54], 2012 TCC 376 (Informal Procedure)
The taxpayer, which installed heating, air conditioning and ventilation systems in residential homes, claimed SR&ED credits relating to its "High Static High Velocity Fan Coil System Development" project. The Minister denied the credits on the basis that the project entailed routine engineering.
Hogan J. granted the taxpayer's appeal, subject the $12,000 limit under the informal procedure. The goal of the project was to reduce noise from vents occurring throughout a house, achieve constant static pressure, and adapt a foreign boiler and motor to North American standards in order to use them in a system for which they were not designed and in which they had not previously been tested. These goals entailed substantial technological risk and uncertainty. Based on that finding, and considering the project under the other four factors listed in Northwest Hydraulic, Hogan J. found that the project qualified as SR&ED.
Murray Arlin Dentistry Professional Corporation v. The Queen, 2012 DTC 1149 [at 3339], 2012 TCC 133 (Informal Procedure)
Woods J. found that it was not reasonable for the taxpayer, a professional corporation belonging to Dr. Arlin, to claim credits on the basis that one fifth of Dr. Arlin's salary was in respect of scientific research. Dr. Arlin was a dental surgeon, who used specialized software to accumulate data over approximately fifteen years on the approximately 12,000 dental implants he administered in that time. His evidence was too vague to support a conclusion that he actually spent much time on these activities, and the convenient nature of the software suite also suggested that the time investment would have been minor.
Woods J. also stated (at para. 20):
It is the position of the respondent that there was insufficient evidence of systematic investigation because hypotheses were not determined prior to the data collection. This position is very narrow and I am reluctant to agree with it.
Soneil International Limited v. The Queen, 2011 DTC 1282 [at 1592], 2011 TCC 391
D'Arcy J. denied the taxpayer's claimed SR&ED credits arising from the development of various electrical systems for use in wheelchairs - a power optimizer to switch power between the front and back wheels of a wheelchair or scooter, an inhibitor to ensure that a wheelchair remain stationary while being charged, a virtual battery system to derive 36 volts of potential from two 12-volt batteries, and a multi-voltage output charger. The purported technological uncertainty was not compelling, as the issues raised were design problems rather than scientific problems. (For example, the purported uncertainty in the virtual battery project was "whether a safe and effective virtual battery could be developed that would be suitable for use by disabled people operating wheelchairs.") The work could be completed using existing electronic and mechanical components, and products performing similar functions already existed.
Advanced Agricultural Testing Inc. v. The Queen, 2009 DTC 687, 2009 TCC 190
The taxpayer in carrying out work largely under the supervision of a researcher who was not its employee or representative, and in testing the effectiveness of products that had already been commercially developed, did not qualify for deduction as SR&ED.
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|Tax Topics - Income Tax Act - Section 37 - Subsection 37(10)||27|
Zeuter Development Corporation v. The Queen, 2007 DTC 41, 2006 TCC 597 (Informal Procedure)
Little J found that a project of developing an interactive software tool to assist high school students with physics and mathematics did not qualify as SR&ED because there was no technological or scientific uncertainty involved. He stated (at para. 24):
Novelty or innovation in a product is not sufficient to illustrate technological advancement; rather, it is how these features arise that is important, that is whether or not they arise through the process of SR & ED.
Tacto Neuro Sensory Devices Inc./Appareils Neurosensoriels Tacto Inc. v. The Queen, 2005 DTC 457, 2004 TCC 341
Work carried out by the taxpayers to improve the performance of a tactometer represented "routine techniques and standard procedures generally accessible to competent professionals in the field" (p. 461), and did not qualify as SR&ED.
Maritime-Ontario Freight Lines Limited v. The Queen, 2003 DTC 1410, 2003 TCC 674 (Informal Procedure)
Various efforts made by the taxpayer to improve the accuracy of a freight weighing device did not qualify given that there was "some merit" in the Crown expert's contention that the manner in which the taxpayer proceeded was akin to the use of routine or standard engineering practices, it was difficult to understand what hypothesis, if any, was made and what steps were being proposed to eliminate the technological uncertainty if one existed, and virtually no records were kept of any hypotheses tested and of results as the work progressed.
C W Agencies Inc v. The Queen, 2000 DTC 2372 (TCC), aff'd 2002 DTC 6740, 2001 FCA 393
Bonner T.C.J. accepted (at p. 2382) the evidence of the Crown's expert that the cost incurred by a lottery ticket marketer in developing an information system employing object-oriented architecture did not represent SR&ED because "the project used commercially available products and services, and current information systems development methodologies and practices throughout". Bonner T.C.J. also noted (at p. 2381) that "mere size and complexity do not support a conclusion that the work was anything more than routine information systems development".
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|Tax Topics - General Concepts - Onus||105|
Knowledge Systems Inc. v. The Queen, 2000 DTC 2353 (TCC)
McArthur TCJ found (at p. 2360):
"What the Appellant did was take existing technology computer hardware and PacRat software, and record personal messages that cannot be understood or tested by anyone else but [its principal]. This does not constitute SR&ED."
Safety Plus Inc. v. The Queen, 99 DTC 537 (TCC)
Two projects for the development of a system for recycling sludge or dealing more economically with the disposition of waste chemicals did not evidence a type of uncertainty that could not be removed by standard engineering practice and routine development and, accordingly, did not qualify.
116736 Canada Inc. v. The Queen, 98 DTC 1816,  3 CTC 2679 (TCC)
Before finding that the taxpayer had been engaged in qualifying SR&ED, Archambault TCJ. noted (at p. 1821) that the Act and Regulations "do not require that... written reports be produced in order for a taxpayer to qualify for the deduction of such expenditures: it is possible to adduce evidence by way of oral testimony".
Data Kinetics Ltd. v. The Queen, 98 DTC 1877 (TCC)
The taxpayer, which was engaged in researching and developing advanced data management and memory management software systems for large mainframe computers, and which had adopted the proxy method for calculating SR&ED expenditures, was able to include in s. 37(8)(a)(ii)(B)(I) the cost of a dedicated telephone line that was used to pass instructions and data from the taxpayer's employees in Ottawa (none of whom left Canada) to the staff of an independent company in Birmingham, Alabama whose mainframe computer the taxpayer was leasing for testing purposes. Lamarre TCJ. stated (at p. 1883):
"Testing would not normally be considered as an eligible SR&ED activity. It becomes an eligible activity only when it is required as part of a systematic experimental investigation, which is the case here."
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|Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a)||144|
Northwest Hydraulic Consultants Ltd. v. The Queen, 98 DTC 1839,  3 CTC 2520 (TCC)
The taxpayer was an engineering consultant firm that specialized in the development, management and protection of water resources. Of the five hydraulic model studies reviewed by Bowman TCJ., four were found to have a sufficient degree of technological uncertainty for the work to qualify as SR&ED. Bowman TCJ enunciated five factors to be considered in SR&ED determinations (at para. 16):
- Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
- Did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
- Did the procedures adopted accord with the established and objective principles of the scientific method, including the formulation, testing and modification of hypotheses?
- Did the process result in a technological advancement?
- Was a detailed record kept of the hypotheses, tests and results kept as the work progressed?
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|Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc.||72|
Telecomsyst Services Inc. v. The Queen, 97 DTC 684 (TCC)
The taxpayer was found not to be engaged in SR&ED given that the only tests conducted by it in the year in question was testing of devices already on the market that had been designed from technologies developed in the United States.
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|Tax Topics - General Concepts - Evidence||94|
Progressive Solutions Inc. v. The Queen, 96 DTC 1232 (TCC)
Archambault TCJ. accepted the evidence of the taxpayer's expert witness that the development by the taxpayer of a program improved an existing computer process (enabling the taxpayer to produce more efficient high-quality software products) and was the result of systematic investigation (notwithstanding very little documentary evidence of such investigation). Furthermore, the development of a second software program was undertaken directly in support of designing the first program. Accordingly, both activities constituted SR&ED.
ETA Performance Systems Corp. v. MNR, 93 DTC 451,  1 CTC 2710 (TCC)
A supposed research project which folded after the initial phases of work and therefore consisted only of routine data collection and research in the educational area did not qualify as scientific research described in Regulation 2900.
Canalerta Technologies Inc. v. MNR, 93 DTC 165,  1 CTC 2141 (TCC)
In finding that "thinking, contemplating and meditating" by a researcher did not constitute scientific research and experimental development, Rip J. stated (p. 172):
"... Scientific research contemplates activities which might be based on hypothesis in respect of which the objective is the gaining of knowledge. To obtain that objective, theories must be tested against empirical data ... There is no evidence produced by the appellant to indicate d'Alerta carried on any of his work in nerve and muscle therapy research according to any plan or organized method."
Revelations Research Ltd. v. MNR, 92 DTC 1036,  1 CTC 2136 (TCC)
Christie A.C.J. accepted the evidence of the Crown's scientific expert that the proposed research program of the taxpayer was not carried out in any systematic, scientific manner and that the principals involved had no work experience in the central areas of the project. Accordingly, their work did not qualify as scientific research and experimental development.
Sass Manufacturing Ltd. v. MNR, 88 DTC 1363,  1 CTC 2524 (TCC)
The taxpayer's appeal failed with respect to the deduction of expenses it incurred in manufacturing a machine in accordance with the engineering design and detailed drawings of a customer not only because the taxpayer had no right to the results of its research and investigation but also because the evidence fell "far short of establishing the existence of any systematic investigation or search carried out in a field of technology by means of experiment or analysis" (p. 1371).
An expenditure incurred by a resource corporation which qualifies as Canadian exploration expense cannot be a qualified expenditure in respect of SR&ED by virtue of para. (h) of the definition, notwithstanding that the CEE is renounced. CRA stated that by virtue of such renunciation, the corporation
is deemed not to have incurred the CEE expenses by virtue of paragraph 66(12.61)(b). However, such renounced CEE would still be expenditures incurred with respect to "prospecting, exploring or drilling for, or producing minerals, petroleum or natural gas."
18 September 2013 Draft examples to illustrate key concepts in the Eligibility of Work for SR&ED Investment Tax Credits Policy
CRA provides 10 examples to clarify its position on its SR&ED Investment Tax Credits Policy:
Examples dealing with subheading 2.1.1 ("Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?"):
Example 1 distinction between a technical problem (correcting problem of corroding pump using standard practice) and a technological uncertainty (no existing solution to corrosion problem).
Example 2 technological uncertainty criterion ("There was technological uncertainty in developing a continuous method to process oilseeds at low temperatures because no one knew whether the objective could be achieved...")
Example 3 there can be technological uncertainty in meeting a cost target ("To achieve ... a room-temperature carbon monoxide remover ... the company has to develop an inexpensive process that operates effectively at room temperature.")
Example 4 application of standard techniques does not entail technological uncertainty ("growers are reasonably certain that the techniques, data, and procedures ... would work.")
Example dealing with subheading 2.1.2 ("Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?"):
Example 5 formulation of suitable hypothesis for SR&ED ("The chemist hypothesized that...the use of the new bonding agent ... under the right conditions should increase the bond strength.. .")
Example dealing with subheading 2.1.3 ("Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?"):
Example 6 trial-and-error approach is not SR&ED ("[In] attempting to create the low-calorie pizza ... [t]he only lesson learned from each attempt was that it failed. There was no work at any stage to analyze the results...")
Example dealing with subheading 2.1.4 ("Did the process result in a scientific or a technological advancement?"):
Example 7 innovation is not coterminous with technological advancement ("there was no technological advancement in creating this "glow-in-the-dark" peeler.....[However,] the acquired know-how to develop the new injection molding process represented a technological advancement...")
Example dealing with subheading 2.2.1 (Determine the extent of eligible work - "Support work"):
Example 8 only the portion of project commensurate with SR&ED needs qualifies as such ("the company determined that 500 sticks [compared to a larger order of 2,000 field-hockey sticks] from the cutting and rasping machine would generate sufficient out-of-tolerance sticks to test and validate, with 95% confidence, that the development could be considered complete...")
Example dealing with subheading 2.2.2 (Determine the extent of eligible work - "Excluded work"):
Example 9 distinction between support and excluded work is informed by its purpose ("data collection and testing that the technologist carries out specifically for the chemist's research project are directly in support of SR&ED. However, the data collection and testing the technologist performs on a daily basis ... are excluded.")
Example dealing with subheading 3.2 ("Company project versus SR&ED project"):
Example 10 SR&ED carved out from a larger company project ("the SR&ED project encompasses the work done to miniaturize the specific component, which is a subset of the overall company project.")
Eligibility of Work for SR&ED Investment Tax Credits Policy, 24 April 2015
In the first step of CRA's two-step analysis of SR&ED ("determine if there is SR&ED" and "determine the extent of eligible work"), CRA sets out five questions, based on the s. 248(1) definition of SR&ED:
Subheading 2.1.1: Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?
[Doubt as to a problem's solution] can arise from a technical problem or from a technological uncertainty, so it is important to make a clear distinction between the two. A technical problem is resolved by applying practices, techniques, or methodologies that are known by the company or available in the public domain. ... On the other hand, a technological uncertainty cannot be resolved using the existing technology base or level and requires experimental development to resolve the problem....The size and complexity of a project by itself does not justify that the work performed in that project falls within the definition of SR&ED. ... However, a form of technological uncertainty called system uncertainty can arise from or during the integration of technologies, the components of which are generally well known. ... The attempt to resolve these uncertainties by a systematic investigation or search can lead to technological advancement.
Subheading 2.1.2: Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Here, "hypothesis" means an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea.
Subheading 2.1.3: Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?
In SR&ED, it is expected that a planned approach is formulated; that is:
- formulating one or more hypotheses designed to reduce or eliminate the uncertainties;
- planning and executing the testing of the hypotheses by experiment or analysis (may include work on the evolution of prototypes or models); and
- developing logical conclusions based on the results or findings of the experiment or analysis.......
The need for a systematic investigation does not preclude ideas that result from intuitive processes. Intuitive creativity can give rise to ideas without evident, ordered, rational thought or inference. These ideas can lead to hypotheses for testing that are part of experimental development.
Subheading 2.1.4: Did the process result in a scientific or a technological advancement?
Scientific or technological advancement is the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology. One implication of advancement is that the new knowledge is applicable in a broader sense. That is, the new knowledge could be useful to other situations or circumstances beyond the current project in which the advance was made.
The rejection of a hypothesis is advancement because it eliminates a possible solution....
Process optimization and cost reduction are examples of process development efforts with the objectives of improved efficiencies, better output quality, or financial or strategic advantages. ... If such process optimization efforts do not face and address one or more clearly articulated technological uncertainties, then they are not experimental development.
Subheading 2.1.5: Was a record of the hypotheses tested and the results kept as the work progressed?
It is important to note that this question pertains only to documentation that is naturally produced during the performance of SR&ED. Please refer to Appendix 2 of the latest version of the T4088 Guide to Form T661 Scientific Research and Experimental Development (SR&ED) Expenditure Claim for information on documentation and other evidence to support an SR&ED claim.
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|Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development||158|
Eligibility of Work for SR&ED Investment Tax Credits Policy, 24 April 2015
Regarding the second step of CRA's two-step analysis of SR&ED ("determine if there is SR&ED" and "determine the extent of eligible work"), CRA states:
Support work must be the following:
- It must be commensurate with the needs of the basic research, applied research, or experimental development work undertaken in Canada. In other words, it must be corresponding in the amount, size, extent, or duration of work that is necessary to carry out basic research, applied research, or experimental development work undertaken in Canada.
- It must be directly in support of the basic research, applied research, or experimental development work undertaken in Canada. That is to say, the work was carried out specifically to perform the related basic research, applied research, or experimental development work undertaken in Canada.
- It must be with respect to one of the eight categories of work listed below:
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|Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development||597|
In considering the conditions under which a shale gas well would qualify for Canadian development expense credits, CRA noted that drilling the well may qualify for scientific research and experimental development credits if done for "experimental development of a new technology."
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|Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - Canadian development expense - Paragraph (a)||126|