Recent Tax Court Case Admonishes CRA For Lack of Negotiation With Claimant

By: BeneFACT Marketing in CRA Updates

March 14th, 2016

A new court case has found in favour of a SR&ED claimant, who was denied by the CRA because they had limited contemporaneous documentary evidence. The court decision asserted the rights of the claimant to utilize oral testimony, and ordered the CRA to pay their court costs for not engaging in negotiations initiated by the claimant.

Whether or not oral evidence is sufficient to support your SR&ED is an issue that arises again and again in CRA audits. Related decisions from the Tax Court of Canada are varied but more often than not, it is upheld that credible oral evidence can be a substitute for documentary proof. Nevertheless, oral evidence on its own, absent correlating documentary evidence is generally not sufficient. In ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2015 TCC 263 (CanLII), the Tax Court of Canada reminded the Ministry of National Revenue and CRA that the normal rules of evidence apply to SR&ED claim disputes. Accordingly, it is clear that CRA’s oft-repeated requirement that perfect documentary evidence is compulsory to support a SR&ED claim has no basis in law. At paragraph 39, Campbell J. stated: “It will always be preferable that an appellant maintain contemporaneous documents to support its systematic investigative procedures and methods, as noted by Justice D’Auray in 6379249 Canada Inc. v The Queen, 2015 TCC 77, [2015] TCJ No. 62, at paragraphs 71, 72 and 92, the Act contains no legislative requirement to file those documents in order to qualify for the deduction of expenditures. Justice Jorré in Les Abeilles Service de Conditionnement Inc. v The Queen, 2014 CCI 313, 2014 DTC 1219, made a similar observation and Justice Archambault in 116736 Canada Inc. v The Queen, 98 DTC 1816, at paragraph 41, stated:

However, the Act and the Regulations do not require that such 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. Whether the Minister or a judge could conclude that the activities purported to have been carried out by the taxpayer were actually carried out then becomes a question of credibility.”

More recently, the Tax Court considered the issue of costs involved in taking a case all the way to tax court, in ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2016 TCC 50 (CanLII). The Appellant sought and was awarded substantial indemnity costs covering 93 percent of fees incurred. The Respondent (CRA) asked that costs be limited to 50 percent. In the lead-up to trial the Appellant made two settlement offers to CRA for lower than the amount ultimately won at trial. However, Campbell J. relied on the fact that CRA basically ignored the Appellant’s offer on the basis that the lack of documentary evidence caused a “legal disability,” preventing the CRA from assessing the projects and making a counter offer. Not only did the Tax Court reiterate the fact the credible oral evidence is a factor to consider when reviewing a SR&ED claim, the CRA cannot rely on its legally baseless mandate of perfect supporting documentary evidence to avoid cost consequences. At paragraph 12: The Respondent claimed that it did not make a settlement offer in part due to inadequate documentation. The Appellant made two different settlement offers, each of which were for amounts that were less than the total amount of qualifying expenses that were in issue. It is for these very reasons that the Respondent should have engaged in the negotiation process in anticipation that it was open to this Court to weigh both the oral and documentary evidence, which is what occurred [emphasis added]. This case not only supports companies who have “imperfect evidence” in the eyes of a CRA reviewer, but also may encourage CRA reviewers to put forth an effort to negotiate in good faith with claimants to avoid unnecessary legal costs. BeneFACT is Canada’s largest independent SR&ED consulting firm. Call us at 1-855-TAX-BACK (829-2225) to start collecting all the R&D tax credits you are entitled to today.