SR&ED Case Law – Documentation

The Tax Act allows and encourages the private sector to develop new products through offering attractive incentives to those who are willing to undertake SR&ED of the kind outlined in regulation 2900 of the Tax Act. The Canada Revenue Agency (CRA) began looking to documentation as a means of challenging technological eligibility in the latter part of the 1990’s as evidenced by this case law.

In 1998, Judge JA Robertson ruled in favour of the taxpayer on appeal from a Tax Court of Canada decision. In this appeal, the issue of concern was whether the taxpayers were obligated to give documentary evidence of test results in order to claim the tax benefits under the SR&ED program. The tax court Judge had indicated that the taxpayer was not entitled to any benefits as convincing evidence was not given to the CRA. This was despite an investigation that had found out that the taxpayer’s firm had engaged in SR&ED. In this case, it could be stated that the Judge erred in making this judgement, as there was enough and convincing evidence of technological advancements in the firm.

In 2003, a Judge by the name Justice Sarchuk ruled in a similar manner against Maritime-Ontario Freight Lines Limited. He stated that the requirements of a proper and detailed scientific experimentation should be backed up by detailed records, which are subject to verification independently. He further added that an acceptable level of documentation is one that openly shows the processes of a firm and how the final details were arrived at. On checking the documents presented before the court, Justice Sarchuk stated that they were unintelligible not only to the court, but also to any party like the CRA.

These two scenarios show that the taxpayers did not follow the SR&ED laws as required, hence both appeals were dismissed.

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