Section 37

Subsection 37(1) - Scientific research and experimental development


International Nickel Co. of Canada Ltd. v. MNR, 71 DTC 5332 (FCTD)

Before going on to find that the taxpayer's expenditures on scientific research (which were deducted in computing income under s. 72 of the pre-1972 Act) were capital expenditures and, therefore, not deductible for depletion allowance purposes, Cattanach J. stated (at p. 5347):

"The obvious purpose of section 72 is to permit the taxpayer to deduct from its income the amount spent on scientific research within the meaning of section 72 which might not otherwise be deductible either because it was barred by section 12(1)(b) as capital expenditures or because of the possibility the amount so expended might not be incurred directly in the income earning process within the meaning of section 12(1)(a)."

See Also

Rouleau c. La Reine, 2007 DTC 1619, 2007 TCC 338 (Informal Procedure)

Archambault J. found that a purported partnership of which the taxpayer was a purported member was not carrying on any business (as it was created solely to transfer R & D tax deductions to investors) so that the taxpayer was not entitled to any deductions under s. 37 in respect of alleged expenditures of the partnership.

Tigney Technology Inc. v. M.N.R., 97 DTC 414 (TCC)

The taxpayer, which was performing cancer research in Canada for a Swedish firm, incurred costs in respect of a temporary facility in Kentucky. The facility was required because in order to extract pharmaceuticals that the Swedish firm wanted, it was necessary that tobacco plants be harvested and processed within two hours. In finding that these expenditures were qualified expenditures, Bell TCJ. found that the portion of the research that physically took place in Kentucky was an isolated and relatively small part of the systematic investigation which was ongoing in Canada, and that the experiments conducted in Kentucky were not a separate and distinct systematic investigation but were part of the continuous scientific research on tobacco being carried on in Canada.

Halak v. MNR, 89 DTC 531 (TCC)

Because the taxpayer had ceased to make SR&ED expenditures by 1983, he lost the ability to carry forward his pre-1983 expenditures.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(4) 38

Power v. MNR, 89 DTC 449 (TCC)

The taxpayer was unsuccessful in seeking to deduct a portion of capital contributions which she made qua limited partner to a partnership engaged in basic and applied scientific research. "[A] deduction under section 37 must be made at the partnership level and not at the partner level unless expressly excluded as a partnership deduction."

Gaspet Ltd. (formerly Saga Petroleum (U.K.) Ltd.) v. Elliss, [1987] BTC 218 (C.A.)

The taxpayer's Irish affiliate ("Saga Ireland") was a member of an oil exploration syndicate whose operator ("B.P.") carried out exploration work under an operating agreement on behalf of the other members of the syndicate, including Saga Ireland. The taxpayer without the knowledge of the syndicate members agreed to provide all the funds required by Saga Ireland under the terms of the operating agreement in return for all petroleum "won" by Saga Ireland.

The payments made by the taxpayer to Saga Ireland did not constitute expenditures "directly undertaken by him or on his behalf" (s.91(1)(a), Capital Allowances Act 1986). "A close relationship between the claimant and the undertaking of the research is inherent in the language." It was noted that "on behalf of" denotes an agency relationship and that "undertaking the research" refers to "persons who have commissioned it, in a wide sense, i.e., without any direct contractual link as a necessary requirement".

Administrative Policy

23 September 1998 Internal T.I. 7-980908 -

For purposes of the SR&ED deduction and ITC, the term "Canada" does not include the area of water off the coastline of Canada outside the 12-nautical mile limit. Accordingly, SR&ED performed beyond that limit will not be eligible for the SR&ED tax credit.

Application Policy SR & ED 96-04 "Payments to Third Parties for SR & ED".

93 C.R. - Q. 2

The fact that a subsidiary does not have the right to exploit the results of SR&ED that it carries out would not, in and by itself, effect its ability to deduct the SR&ED expenditures incurred by it and claim the related investment tax credits in computing its income.

23 November 1993 Internal T.I. 5-932240 -

Where a non-resident company makes charges in the form of technical fees, royalties or licence fees to a Canadian taxpayer for the right to manufacture or produce a product developed as a result of SR&ED previously performed in Canada, this will not jeopardize the eligibility of the Canadian taxpayer for the ITC.

19 October 1993 T.I. 932981 (C.T.O. "Approved for Scientific Research")

All Canadian universities and affiliated colleges are automatically considered by RC to be "approved" entities under s. 37(1)(a)(ii)(B). The criteria for granting written approval of other entities are discussed.

18 May 1993 T.I. (Tax Window, No. 31, p. 8, ¶2517)

Discussion of criteria applied in determining whether an organization is approved.

30 March 1993 T.I. (Tax Window, No. 29, p. 2 ¶2449)

An asset can be eligible for the deduction under s. 37(1)(b), in lieu of claiming capital cost allowance, if an election is made under s. 16.1.

Tax Professionals Mini Round Table - Vancouver - Q. 20 (March 1993 Acess Letter, p. 107)

If an expenditure on scientific research is on current account and for an income-producing purpose, it is deductible without reference to s. 37.

20 August 1992 External T.I. 5-921392 -

The phrase "entitled to exploit" in s. 37(1)(a)(ii) means that the contributor should be charged a royalty at a lower rate than that charged to non-contributors. The contributor should have the results of the SR&ED project in its possession.

7 August 1992 T.I. (Tax Window, No. 23, p. 15, ¶2131)

Where the SR&ED expenditures of a Canadian corporation are reimbursed by its U.S. parent and the Canadian corporation does not retain the right to exploit the results of the research, RC views the Canadian corporation as acting as agent for the U.S. parent, with the result that the expenditures are not eligible under s. 37(1)(a)(i).

91 C.R. - Q.32

The related business requirement generally will be satisfied when the results of the SR&ED, if successful, have a direct and beneficial application in the business.

91 CPTJ - Q.27

Where payments are made to a corporation resident in Canada to do scientific research and development work on behalf of the taxpayer and the second company subcontracts some of the work to another company in the U.S., the payments by the taxpayer will not qualify.

16 December 1991 T.I. (Tax Window, No. 11, p. 20, ¶1539)

Landscaping costs which will be deductible under s. 20(1)(aa) cannot qualify as SR&ED expenditures. However, a taxpayer whose sole business was conducting SR&ED and who incurs normal landscaping maintenance and upkeep costs will be able to deduct those costs under s. 37(1)(a)(i).

September 1991 Memorandum (Tax Window, No. 10, p. 7, ¶1477)

IT-151R3, para. 5 still largely represents RC's policy on the meaning of the phrase "related to the business".

13 June 1991 T.I. (Tax Window, No. 4, p. 24, ¶1302)

Where the receipt of government assistance depends upon expenditures actually being made, s. 37(1)(d) will only apply to government assistance which relates to expenditures made within the fiscal year.

18 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 20, ¶1018)

In order for an organization to qualify under s. 37(1)(a)(ii)(A) or (B), it must be a non-profit organization that has facilities and personnel capable of carrying out SR&ED, it must have adequate funding to ensure continued SR&ED, it must carry on activities that are unquestionably SR&ED and the general public must be the beneficiary of such activities.

5 February 1990 T.I. (July 1990 Acess Letter, ¶1318)

Where a Canadian parent makes a contribution of capital to its wholly-owned subsidiary corporation to fund capital expenditures on SR&ED, the amount received by the subsidiary will not be treated as "non-government assistance" for purposes of s. 37(1)(d).

Where a taxpayer with calendar year-ends receives assistance on June 1, 1989 for expenditures described in ss.37(1)(a) and (b) that had been a rule be made in 1989, such assistance will not be required to be added to its income for the 1988 year even though it was received prior to the June 30, 1989 tax return filing date.

31 October 89 T.I. (March 1990 Acess Letter, ¶1144)

Discussion of the criteria for granting approval of an association or an educational institution.

88 C.R. - Q.70

re distinction between capital expenditures and current expenditures.

87 C.R. - Q.20

Deductibility of financial contributions to an industry research institute.

87 C.R. - Q.21

IT-364 is applicable re whether the taxpayer has commenced to carry on a business.

87 C.R. - Q. 27

Foreign travel expenditures, including remuneration, will generally be allowed if they are directly attributable to R & D carried on in Canada.

86 C.R. - Q.17

Carry-forwards must relate to a business carried on by the taxpayer in the current year.

85 C.R. - Q.47

Disposition of a capital property a short time after its acquisition will be considered as evidence that the property was not acquired wholly for purposes of undertaking scientific research.


B. Cookson, K. Wensley, "Research and Development Roundtable", Summarized in 1997 Canadian Tax Journal, Vol. 45, No. 6, p. 1303.

Paragraph 37(1)(a)


LGL Ltd. v. The Queen, 2000 DTC 6108 (FCA)

The taxpayer carried on an SR&ED project relating to the environmental effects of offshore oil and gas development on whales, birds and fish. In finding that the direct cost of the data collection and allocable overhead for the work done outside Canada did not come within s. 37(1)(a)(i), the Court rejected a submission that once a project qualifies as SR&ED it must be looked at integrally and a determination made as to whether the project taken as an indivisible whole was carried on in Canada (as was argued to be the case here) or outside Canada. McDonald J.A. noted that in addition to the language of s. 37(1)(a) being clear on this issue, the suggested approach would inevitably lead to uncertainty for taxpayers whose SR&ED projects involved undertakings both inside and outside of Canada.

Canada v. Tigney Technology Inc., 2000 DTC 6112, 2002 FCA 161 (FCA)

The taxpayer, which was performing cancer research in Canada for a Swedish firm, incurred costs in respect of a temporary facility in Kentucky. The facility was required because in order to extract pharmaceuticals that the Swedish firm wanted, it was necessary that tobacco plants be harvested and processed within two hours. The Court followed the LGL case in finding that the taxpayer, which was engaged in SR&ED in Canada, was not permitted to treat the costs of its experiments in Kentucky as coming within s. 37(1)(a)(i).

Subparagraph 37(1)(a)(i)

See Also

Concept Danat Inc. v. The Queen, 2019 TCC 32 (Informal Procedure)

SR&ED claim could not be based on estimated hours worked

The taxpayer, who had a business of embroidering clothing with lettering, reported the amount expended on three of its alleged SR&ED projects based on its estimate that its employees spent 10.2% of their time on the SR&ED activities, and applying that percentage to their salaries. In finding that this was insufficient support for SR&ED expenditures, Lafleur J stated (at para.52, TaxInterpretation translation):

Danat has not provided exact details of the hours devoted to the projects. I am of the view that an exact register of the hours worked must be provided in order to make an SR&ED claim (Hypercube … ). Similarly, the description of the tasks carried out by the different employees was not clear or sufficiently detailed enough to make the claim.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development using existing equipment in developing a new product was not R&D 212

Subparagraph 37(1)(a)(ii)

Clause 37(1)(a)(ii)(A)

Administrative Policy

21 February 2013 External T.I. 2012-0442751E5 F - Non-Profit SR&ED corporation

requirements for approval under (A) or (B) of research association

In the course of a general discussion, CRA stated:

We list the following requirements as set out in the Canada Revenue Agency ("CRA") Third-Party Payments Policy dated December 19, 2012 (the "Policy"), which must be met in order for an organization to be approved by the Minister under clauses 37(1)(a)(ii)(A) and (B):

1. the entity must have the facilities, equipment and personnel capable of performing SR&ED as set out in the Act;

2. the entity must only engage in activities that are indisputably SR&ED;

3. the entity must meet the requirements for non-profit organizations. Thus, there should be no personal benefit to the members or control of other associations, and there must be satisfactory arrangements for the disposition of assets at the time of dissolution;

4. the general public should benefit from the results of any successful research;

5. the funding of the association or research institute must be sufficient to ensure the continuity of SR&ED activities.

However, in the absence of the Minister's approval, a corporation resident in Canada that is exempt from tax by the application of paragraph 149(1)(j) could effectively be considered a non-profit corporation for SR&ED under paragraph 149(1)(j).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(j) various stipulated s. 149(1)(j) requirements not stipulated in articles or by-laws 515

Clause 37(1)(a)(ii)(B)

Administrative Policy

5 January 2016 External T.I. 2013-0515771E5 F - Établissement semblable agréé

applicant’s activities not unquestionably SR&ED

CRA declined to approve the applicant as an "approved similar institution" for purposes of s. 37(1)(a)(ii)(B), on the basis that its

activities are specifically excluded from the definition of "SR&ED" [under ss. (e) to (k)] such as XXXXXXXXXX as well as activities that do not constitute SR&ED as they do not relate to or support SR&ED activities.

9 September 2014 External T.I. 2014-0537371E5 - Approved Research Institute Status

conversion of institute to registered charity

Changes to Letters Patent in order for the "Institute" to qualify as a registered charity would not affect its status of approved research institute for purposes of s. 37(1)(a)(ii)(B). The amendments included changes to its SR&ED objects to "advance education" through SR&ED and to improve the efficiency of another registered charity through SR&ED, and to provide that on dissolution all remaining property would be distributed to other registered charities.

Paragraph 37(1)(d)

See Also

Borealis Geopower Inc. v. The Queen, 2018 TCC 189 (Informal Procedure)

taxpayer had “physically” received unearned government assistance because it had authority to deal with the funds

The taxpayer, a privately owned Canadian corporation involved in geothermal power exploration, development and utilization in Canada, was paid $528,560 in 2014 as a first advance, as assistance towards its SR&ED project, from Sustainable Development Technology Canada (“SDTC” – a government foundation) notwithstanding that one of the conditions for receipt of this payment under the Contribution Agreement between it and SDTC (the “first Milestone”) was never satisfied. In finding that the taxpayer had thereby “received” government assistance in 2014 as described in s. 37(1)(d), Campbell J stated (at paras 26, 28):

The Appellant had sole access to the funds in this trust account. It had the authority to deposit and withdraw. There was no trust agreement between SDTC and the Appellant. There may have been an informal agreement respecting those funds but there was no obligation for the Appellant to notify SDTC when it transferred amounts from the trust account to another account. …

In accordance with the ordinary dictionary meaning of “receive”, the Appellant physically acquired and accepted an advance of funds by way of a cheque from SDTC. The advance was given prior to the completion of the first Milestone and no conditions were superimposed on the transfer. … It was the Appellant’s decision to open a trust account and deposit those funds to that account. It exercised control over the funds in relation to expenditures in the work project, when to withdraw and how much to withdraw.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt taxpayer had "physically" received govenment assistance funds with freedom to transfer 106
Tax Topics - Income Tax Act - Section 162 - Subsection 162(11) loss carryback did not reduce late-filing penalty or interest 261

Subsection 37(2) - Research outside Canada


Romar v. Canada, 2010 DTC 5076 [at 6816], 2009 FCA 48

Two Ontario partnerships of which the taxpayers were members paid for research to be carried out on their behalf by a Brazilian research corporation, in part, by issuing notes to the research corporation denominated in Brazilian currency and payable in annual installments commencing seven years hence.

The amount of the expenditures made by the partnerships should be determined, in light of generally accepted accounting principles on the basis of substantially discounting the value of the notes given that the interest rates borne by the notes were substantially lower than prevailing Brazilian interest rates (which, in turn, reflected high rates of inflation).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Accounting Principles 101

Beaudry v. The Queen, 2010 DTC 1266 [at 3853], 2008 TCC 17, aff'd Romar v. The Queen, 2010 DTC 5076 [at 6816], 2009 FCA 48

The "research" the taxpayer contracted for with a Brazilian firm did not qualify as scientific research & experimental development under s. 248(1): it was not scientifically noteworthy, considering such factors as the lack of a novel scientific question, and the lack of rigour in the hypotheses, experiments, and records.

Administrative Policy

93 C.R. - Q. 2 (File 932765)

"Testing and data collection that is directly in support of and commensurate with the needs of basic research, applied research and experimental development is SR&ED as contemplated by subsection 2900(1) of the Income Tax Regulations. Consequently, the wage and travel costs of Canadian employees sojourning outside Canada during such testing and data collection taking place outside Canada only qualifies under subsection 37(2)."

Subsection 37(3) - Minister may obtain advice


Stromotich v. The Queen, 88 DTC 6172, [1988] 1 CTC 252 (FCTD)

"There is not mandatory duty on the Minister to obtain advice. There is no legal right in the plaintiff to require him to do so."

Subsection 37(4) - Where no deduction allowed under section

See Also

Halak v. MNR, 89 DTC 531 (TCC)

Because a patent accords the investor the exclusive right to exploit his invention for profit, and is only granted after the invention is created, expenses incurred by the taxpayer with respect to a patent application did not qualify.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) 21

Administrative Policy

84 C.R. - Q.11

S.37(4) will not normally apply to deny a deduction for expenditures made to acquire computer software required to support the taxpayer's research efforts.

Subsection 37(6) - Expenditures of a capital nature

Administrative Policy

1996 Ontario Tax Conference Round Table, "Purchase and Sale of Computer Software, Q. 5", 1997 Canadian Tax Journal, Vol. 45, No. 1, at p. 221

Where the development costs of computer software were claimed as a deduction under s. 37(1)(b), proceeds of disposition of the software will be on income account by virtue of s. 37(6).

Subsection 37(7) - Definitions


Administrative Policy

29 November 2013 External T.I. 2013-0505451E5 - "Approved" Status

approval of SR&ED NPO

Approval of a not-for profit corporation (with any remaining property on dissolution being distributed to one or more Canadian organizations referred to in s. 37(1)(a)(ii)(A), (B), (C) or (E) carrying on similar activities) which will carry on non-domain SR&ED integrated into the XX facilities, will receive private as well as public grants, and will employ basic researchers after interviewing them and subjecting their proposals for an SR&ED eligibility review through a committee.

5 May 1995 External T.I. 5-942198 -

Discussion of distinction between an approved research institute (s.37)(1)(a)(ii)(B)) and a non-profit corporation described in s. 149(j).

19 January 1994 T.I. 931559 (C.T.O. "Approved Status")

Discussion of criteria for an organization to be an "approved association".

Paragraph 37(7)(f)


Mailloux v. Canada (Minister of National Revenue), docket A-390-98 (FCA)

Because a hair dryer was a large building, expenditures for its acquisition did not qualify notwithstanding that it was an experimental prototype. In response to a submission that it was a structure not a building, Létourneau noted that it met the (French) dictionary definition of a building as "any construction intended to serve as shelter and protection" or "construction, generally of large dimensions, ... used to accommodate humans, animals or things".

Words and Phrases

Subsection 37(8) - Interpretation

See Also

CalAmp Wireless Networks Inc v. The Queen, 2013 DTC 1172 [at 939], 2013 DTC 201

A taxation year of "Dataradio" (a predecessor, by amalgamation, of the taxpayer) commenced on 1 May 2006 and ended on 9 May 2006 by virtue of the purchase of all its shares by the newly-incorporated Canadian subsidiary of a U.S.-resident corporation. Dataradio had elected to use the proxy method under s. 37(8)(a)(ii)(B). Bonuses of $1,999,036 paid by the taxpayer to its employees were treated as expenditures incurred by Dataradio on SR&ED in such short taxation year.

In finding that these expenditures did not qualify under s. 37(8)(a)(ii)(B)(IV) as having been incurred in that year for salary or wages of employees "directly engaged" in SR&ED, Bédard J found that the expenditures were not connected with SR&ED activities carried on in that year because they instead represented a sharing in the financial success represented by the sale of Dataradio at a premium price and also were intended create conditions that would favour employee retention at the successor corporation following that taxation year.

Waxman v. The Queen, 97 DTC 705 (TCC)

A partnership that carried out R&D projects respecting the diet and sheltering of steers was entitled to treat substantially all its expenditures as qualified expenditures, including issue expenses and interest expenses. In finding that the purchase price of the steers qualified notwithstanding that they ultimately were sold for meat, Archambault TCJ. accepted evidence that the large size of the herd was justified by the greater reliability of results that would be generated by broader sampling in a commercial farm setting, and that the dictates of the research program required substantially greater expenditures of manpower and feed than would have been the case in a normal commercial operation.

Dew Engineering & Development Ltd. v. The Queen, 96 DTC 1765 (TCC)

A portable laboratory composed of five modules connected to one another by bolts (and that were almost identical to the components of the walkways used at the Ottawa International Airport) was found (at p. 1770) not to be a building given that it was "not installed and intended to remain in a particular location".

Words and Phrases

Administrative Policy

29 November 1993 Internal T.I. 7-932445 -

Discussion of the meaning of "bonus" and "remuneration based on profits" in three contexts.

Words and Phrases


Katiya, "Proposed Changes to the SR&ED Program under the Income Tax Act", 1994 Canadian Tax Journal, No. 42, No. 2, p. 309.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2902 0

Paragraph 37(8)(a)


Alcatel Canada Inc. v. The Queen, 2005 DTC 387, 2005 TCC 149

S.7 employment benefits under an employee stock option program realized by employees engaged in qualifying scientific research activities constituted qualified expenditures of the taxpayer and expenditures made in respect of expenses incurred for salary or wages for purposes of s. 37(8)(a)(ii)(B)(iv), given that the word "expenditure" did not require that there be a disbursement of cash as opposed to a disbursement of other assets, and that "a very real expenditure is accomplished when shares having an established market value are sold for less than [their] value in the context of a scheme for the compensation of the employees who buy them". Furthermore, given that the primary purpose of the stock option program was to compensate employees for their services and to encourage future effort, and the taxpayer did not engage in the stock option program to increase or otherwise alter its capital structure, these expenditures were of a current nature.

Imapro Corp. v. The Queen, 92 DTC 6487 (FCTD)

47.3% of a multi-purpose building which was constructed for a computer graphics corporation was used exclusively by it for scientific research. The corporation was unsuccessful in deducting 47.3% of the construction costs that related to common and administrative areas that were not used solely for scientific research purposes and in the deduction of 47.3% of expenses of a current nature that related to the common areas. McGillis J. stated (p. 6494):

"Even assuming that some leeway is permitted from the 90% rule adopted by the Department ... a 47.3% portion of expenditures incurred in relation to SR&ED would not fall within the meaning of the words 'all or substantially all'."

Words and Phrases
substantially all

See Also

VLN Advanced Technologies Inc. v. The Queen, 2018 TCC 33

work performed for 3rd parties did not qualify as the taxpayer’s own SR&ED

The taxpayer (“VLN”) sold to a U.S. manufacturer (“Pratt”) its patent for coating removal and its intellectual property related to high-frequency forced pulse water technology, and acquired from Pratt equipment (the “System”) to send pulses of water to remove coatings or treat materials. In consideration for the System, VLN was to provide to Pratt research and development (“R&D”) and engineering services (involving design, manufacture and testing) over three years.

Lyons J confirmed the Minister’s position that VLN’s expenditure on the System did not qualify under s. 37(8)(a)(ii)(A)(III). First, removing the hours spent on work for three third parties substantially reduced the percentage of activities of the System on SR&ED. In this regard, she stated (at para. 55) respecting the University of Ottawa (one of the third parties):

…[T]he fact that UO personnel collaborated with the appellant on tasks involving the System and the appellant’s ability to utilize data and findings, does not alter the fact that the research represented the activities of UO researchers on its projects. I find these activities do not amount to the System being used for the appellant’s SRED.

Furthermore (para. 60):

No evidence was proffered to show that the System was used in a systematic way for a particular purpose.

Blue Wave Seafoods Inc. v. The Queen, 2004 DTC 3066, 2004 TCC 553, aff'd 2006 DTC 6155, 2006 FCA 81

The taxpayer, which in its 1995 and 1996 taxation years was acknowledged by the Minister to be engaged in SR&ED in connection with its efforts in developing new products (surimi and tempura) out of silver hake, was found not to be consuming silver hake in SR&ED activities to the extent that the silver hake represented excess fish purchased by it, i.e., fish that was resold at a loss - notwithstanding that the taxpayer effectively was required to purchase all such silver hake in order to encourage the fishing of the silver hake in the first place.

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. In finding that the testing was performed in respect of SR&ED in Canada, Lamarre TCJ. stated (at p. 1884) that "the leasing expenditures made in the U.S. merely facilitate a mechanical testing process that is part and in support of the whole SR&ED project carried on in Canada".

Consoltex Inc. v. The Queen, 97 DTC 724 (TCC)

The cost of yarn that the taxpayer expended in the course of an R&D project qualified under both s. 37(7)(c)(ii)(A) and Regulation 2900(2)(c), notwithstanding that the yarn subsequently was sold. Bowman TCJ. stated (at p. 736) that "the word 'expenditures' is a reasonably comprehensible English word ... . It is something one spends, an outlay. No meaning of which I am aware, either in ordinary parlance or in decided cases, would justify adding after it 'net of sales proceeds'".

He went on to note in light of former s. 4(4) that as the expenditures qualified under s. 37, they could not also be deducted as the cost of sales under s. 9.

Words and Phrases

Administrative Policy

Application Policy SR & ED 96-06 "Directly Undertaking, Supervising or Supporting v. 'Directly Engaged' SR & ED Salary and Wages".

30 May 1990 T.I. (October 1990 Acess Letter, ¶1459)

General discussion.

12 December 1989 Memorandum (May 1990 Acess Letter, ¶1211)

It is not sufficient that an expenditure was intended to be used substantially for research; it must have actually been used in that manner.

Subparagraph 37(8)(a)(ii)

Clause 37(8)(a)(ii)(A)

See Also

Inflection Analytics Ltd. v. The Queen, 2015 DTC 1126 [at 786], 2015 TCC 129 (Informal Procedure)

data licence was not equipment lease

The taxpayer, a developer of market analysis software, paid fees to purchase or license historical securities data in order to simulate market conditions in testing. Boyle J agreed with the Minister that this agreement could not be considered a licence of "equipment" for the purpose of the taxpayer's claims for SR&ED credits. The taxpayer merely had the right to access information via a website rather than "any rights in equipment of the vendor that can be used by the Appellant as it wishes, as was the case [with a US mainframe and a dedicated line to access it] in Datakinetics." (Para. 10.)

Words and Phrases

Clause 37(8)(a)(ii)(B)


AG Shield Ltd. v. The Queen, 2017 TCC 68

individual shareholders could allocate all of their non-dividend earnings to SR&ED wages

The two 50% shareholders of a small business corporation, that followed the proxy method for SR&ED purposes, decided at year end that their draws during the year would be treated as wages to the extent of the number of hours (multiplied by an hourly rate of $30) spent by them on SR&ED, and that the balance of their draws represented dividends. CRA reassessed on the basis that a pro rata portion of the wages should be treated as having been paid for non-SR&ED activities based on the percentage (of well over 50%) of their aggregate hours which was not spent on SR&ED.

In allowing the corporation’s appeal, D’Arcy J stated:

[T]he Respondent argued that… [they] did not receive any compensation for the significant time they spent “performing director or management activities”.... As the controlling shareholders and managing directors of the Appellant, they chose to receive dividends in lieu of salary and/or bonuses. This was their choice and did not require a formal agreement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(2) - Paragraph 2900(2)(b) individual shareholders entitled to find that their non-dividend draws were solely wages for SR&ED prosecution 290

See Also

Oldcastle Building Products Canada Inc. v. The Queen, 2016 CCI 183

sales-based comepensation nonetheless directly related to SR&ED

The taxpayer (“Oldcastle”), which was a leading producer of concrete building products, entered into an employment contract in 2004, with a former shareholder and principal of the business (“Castonguay”) who now was no longer a “specified employee,” for Castonguay to direct a research centre (with a staff of over 25) for the development of new and improved building products. The contract stipulated a base salary, plus a “bonus” (which Archambault J stated he would instead term “variable pay”) calculated as a sliding percentage of the sales (net of shipping and insurance expenses) of new and modified products developed by the research centre. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which Castonguay’s variable pay exceeded $1 million, which was the case in the taxation years in issue (2010 and 2011). Oldcastle took the variable pay into account under Reg. 2900(4) for purposes of computing its prescribed proxy amount having regard to s. 37(8)(a)(ii)(B)(IV).

Before finding that 55% and 40% of the variable pay of Castonguay for 2010 and 2011, respectively (being the respective percentages of Castonguay’s time conceded by the Crown to relate directly to his R&D activities), should be included in computing Oldcastle’s prescribed proxy amount under Reg. 2900(4), Archambault J found (under Reg. 2900(9)(c)) that the variable pay was not a “bonus” given inter alia that the taxpayer had no discretion as to how much it paid, and also that it was not “based on profits” (Reg. 2900(9)(d)) given that the only expenses deducted in arriving as net sales were freight and insurance.

Respecting the Crown position that the variable pay did not qualify as an expense contemplated under s. 37 because “the amount of this compensation references the sales of products respecting which the R&D activities had been performed in prior years” (TaxInterpretations translation, para. 29), Archambault J stated (at paras. 30, 32, 34):

[T]he CRA is confusing the nature of the amount paid with the method of its calculation… .

Linking the remuneration of Mr. Castonguay to the sales of products produced by virtue of the work carried out at the Research Centre ensured that the R&D work was relevant to the mission of Oldcastle, being the realization of profits from goods fulfilling market needs.

The amounts paid did not constitute remuneration for the sale of Oldcastle products because the work of Mr. Castonguay was not the sale of products but, rather, development at the Research Centre of new products, the improvement of products and the discovery of new processes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(9) - Paragraph 2900(9)(c) sales-based remuneration was not bonus 309
Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(9) - Paragraph 2900(9)(d) percentage of net sales was not based on profits 334

Feedlot Health Management Services Ltd. v. The Queen, 2015 TCC 32

work by proxy need not be "for" SRED - only "in respect of" it

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 feeding the cattle, on the basis that Jim Farms was not engaged in SRED and none of the "proxy" provisions in s. 37(8)(a)(ii)(B) applied.

Woods J allowed the taxpayer's appeal, finding that the amounts paid to Jim Farms were "in respect of" the prosecution of research undertaken on the taxpayer's behalf, bringing them within s. 37(8)(a)(ii)(B)(II). 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), and therefore was caught by the exclusion in para. (i) of s. 248(1) - "scientific research and experimental development," an exception which also applies to work by third parties (para. 80). However, although the work was not for SRED, the words "in respect of" also import the meaning "in relation to" (para. 62, citing Savage), and the work related to the taxpayer's own SRED.

Subclause (I) did not apply. The contracts between the taxpayer and Jim Farms gave the taxpayer considerable control over the cattle, including transporting and marketing decisions (so as to ensure that testing was not disrupted), but they were not "leases" of the cattle, as they did not confer an exclusive right of possession (paras. 43-44).

Woods J also rejected the taxpayer's argument that subclause (II) could apply even where there is no contract for third-party SRED (para. 68).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development feed for cattle to be used for beef after SR&ED testing was excluded 213

Paragraph 37(8)(c)

See Also

PSC Elstow Research Farm Inc v. The Queen, 2009 DTC 168, 2008 TCC 694

The taxpayer, which engaged in research as to techniques for maximizing the yield from pig farming operations and, consequently, derived significant revenues from the sale of pigs, deducted such revenues from its expenses in its financial statements.

The only business of the taxpayer was its research business (so that it did not have another business of a commercial pig farm). Furthermore, even if the proceeds of sale of pigs should be taken into account (rather than their deduction from expenses being accepted), such proceeds of sale would still be derived from the taxpayer's research activities, so that it satisfied the "substantially all of its revenue" test in s. 37(8)(c).

Administrative Policy

7 May 1991 T.I. (Tax Window, No. 3, p. 30, ¶1244)

Where a corporate partnership is conducting scientific research and experimental development, s. 37(7)(e) will be applied at the partnership level rather than at the level of the corporate partners.

28 December 1989 Memorandum (May 1990 Acess Letter, ¶1213)

Royalties earned by a taxpayer whose business consists of carrying out SR&ED on its own behalf and licensing the results, meets the revenue test in s. 37(7)(e).

18 December 1989 Memorandum (May 1990 Acess Letter, ¶1212)

Each expenditure made by a single-purpose corporation must still meet the requirements of being incurred for scientific research and experimental development as set out in ss.37(1)(a) or 37(1)(b)(i).

Paragraph 37(8)(d)

Administrative Policy

26 September 1991 T.I. (Tax Window, No. 10, p. 8, ¶1481)

S.37(7)(f)(iii)(B) does not have the effect of excluding payments made to a corporation described in s. 149(1)(j) which deals at arm's length with the taxpayer.

90 C.P.T.J. - Q.16

Additions and alterations to an existing building come within the exclusion in s. 37(7)(f)(i) because "building" includes any additional alteration to an existing building.

1990 Answers of the Scarborough District Office (May 1990 Acess Letter, ¶1200, Q. 7)

Capital expenditures made in respect of refurbishing or renovating a pre-existing building are considered non-qualifying expenditures in respect of "the acquisition of a building" for purposes of s. 37(7)(f)(i).

Subsection 37(10) - Time for election


Advanced Agricultural Testing Inc. v. The Queen, 2009 DTC 687, 2009 TCC 190

The taxpayer was precluded from revoking his election to use the proxy method for his 1995 to 1998 taxation years. Subsection 37(1) was not referred to in Regulation 600.

Subsection 37(11) - Filing requirement


Westsource Group Holdings Inc. v. Canada, 2018 FCA 57

a materially incomplete T661 resulted in a denied SR&ED claim

The Minister denied SR&ED tax credits claimed by the taxpayer (“Westsource”) for a project for the failure of Westsource to comply with ss. 37(11) and s. (12) on the basis that boxes 240, 242 and 244 of the prescribed form (T661) filed by it were left blank, and those boxes addressed the key legislative requirements of technological advancement and uncertainty, and systematic investigation.

Woods JA dismissed the appeal, finding that “the legislation is clear that prescribed information includes information necessary to determine whether the activity qualifies as SR&ED” (para 7). Woods JA further found that while there is a “legislative objective of encouraging research and development activities … another objective is to facilitate tax administration by denying the tax incentives if the filing requirement has not been satisfied.” (para 8).

In rejecting the taxpayers argument that the Minister was already in possession of the relevant information as a corporation related to Westsource had participated in the same project, and that its claims for this project had been accepted by the Minister (and the taxpayer, Woods JA stated that “[t]he information must be provided by the taxpayer on the prescribed form (para 11).”

AFD Petroleum Ltd. v. Canada (Attorney General), 2016 FC 547

missing information in T661 on technological obstacles was substantive/no remedy if T661 rejected after objection period

On December 31 2013, the Applicant requested that its 2012 corporate income tax return be amended to include a claim for SR&ED expenditures, but submitted only 2 pages of the 7 page Form T661. CRA denied the request since the prescribed information was not filed within 12 months after the due date for filing the T2 tax return: lines 244 and 242 were missing which dealt with the technological obstacles and uncertainties the Applicant faced and what work was performed to overcome them to achieve the technological advancements described in line 240.

Boswell J denied the Applicant’s application for judicial review of CRA’s rejection of its SR&ED claim for its 2012 tax year, stating (at paras. 26-7):

The Applicant mischaracterizes the missing information as being just “two missing lines.” The questions at lines 242 and 244 of Part 2 of Form T661 contemplate responses of up to a maximum of 350 and 700 words, respectively. ...

As to the Applicant's argument that the missing information was already filed with CRA in connection with its 2013 SR&ED claim and should have been utilized for purposes of its 2012 claim… [i]t is significant that Form T661 specifically requests information in relation to only the one tax year for which the SR&ED claim is made. …[T]echnological obstacles and uncertainties … could readily change from one year to the next.

The CRA rejection occurred after the period for the Applicant to object to as assessment of its 2012 taxation year had expired; it effectively had no recourse to the rejection. Boswell J accepted the Crown’s submission (at para. 31) that “the Applicant's SR&ED claim for its 2012 taxation year was made by way of an amendment to its T2, and that the Minister cannot be compelled to consider such a request,” and concluded (at para 33) that the CRA had not been procedurally unfair because the Applicant could have filed the Form some 12 months earlier than it did when it filed its income tax return for 2012 and thus still have had time to appeal (so that CRA had not deprived the Applicant of any procedural rights).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) CRA cannot be compelled to consider a request to amend a return 157

See Also

Toronto Dominion Bank v. B.C. (Commissioner of Income Tax), 2017 BCCA 159

May 1, 2014 was not within 18 months of year-end October 31, 2012

The taxpayer (TD) made an unsuccessful submission that because a taxation year ends on the very last instant of the year, a B.C. provision requiring TD to file a return “within 18 months after the end of [its] taxation year” ending on October 31, 2012 was satisfied by delivering its return on May 1, 2014 rather than the previous day.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 27 - Subsection 27(4) filing deadline period started being counted from the day following the year end 249
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.2) Commissioner improperly restricted herself to applying only the published guidelines on extending a return-filing deadline 273

1373744 Ontario Inc. o/a One Source Metal v. The Queen, 2009 DTC 1884, 2009 TCC 511 (Informal Procedure)

Although the taxpayer filed its form T-661 on a timely basis for its 2005 taxation year (i.e. by March 31, 2007), on balance of probabilities it appeared that a technical report was not filed by it or its representative until shortly after April 10, 2007, with the result that the taxpayer's claim was denied.