Precedent Set in Recent SR&ED Case

By: BeneFACTMarketing in Corporate News, SR&ED

November 27th, 2012

An HVAC company recently won a victory in tax court by appealing the CRA’s SR&ED review findings.  Read the full findings through Tax Court of Canada.

In our opinion, the honourable Judge Robert J. Hogan has taken a strong, positive step toward a further understanding and acceptance of claimants’ applications through the SR&ED review process. His explanation of how SR&ED should be recognised and evaluated differs from previous CRA comments. Below is a brief outline of the points touched on throughout the case:

The judge did not use the CRA’s “technological obstacle” process to evaluate SR&ED.

In this case the judge conducts his review through precedent set by former Judge Donald Bowman of NorthWest Hydraulics and never cited any merit in the CRA’s proposals. The claimant builds HVAC systems, which have many components in them, but claimed SR&ED at a product development objective level as their development can only be evaluated by the performance of the overall system. The CRA examined the development of the new system and identified a technological obstacle with only one component, an air diffuser/vent cover. The judge disregarded this approach (that is, CRA’s approach to find a specific technological obstacle and start SR&ED only there). Rather than using this approach, he applied Bowman’s tests to see if SR&ED existed and accepted the claimants argument that SR&ED existed across the overall system.

The judge defined the scale of the project at the highest and broadest level captured by an objective.

Although not stated explicitly, the judge consistently implies the word “technology” is taken to indicate a means of achieving a practical result. The judge looked at the system from one of the highest levels possible, at the product’s objectives, and agreed there was technological uncertainty in reaching them. He then used the objectives to determine how much of the project was in support of SR&ED. For example, reducing noise level was an objective, so any component that had a casual effect on noise was “covered” by that objective. The fact that this level of grouping included routine engineering as cited by the CRA was disregarded by the judge. There are other abstract meanings for the word technology, but put simply, technology covers more than many RTAs believe.

The judge evaluated the evidence as a matter of fact; from facts and deduced intent.

In this particular case, the Judge looked at the evidence and deduced intent. He concluded SR&ED occurred, and he said record keeping was sufficient for this purpose. The judge implied you do not have to write out a hypothesis. In this case the claimant’s records proved they “identified a problem, developed hypothetical solutions, tested them, and modified its approach in response to the results”.

Time will tell what impact this precedent will have on future dealings between SR&ED claimants and the CRA.