Indusol Industrial Control Ltd. v. Her Majesty the Queen

Indusol Industrial Control Ltd. v. The Queen 

2020 TCC 103 Date: 20200914 Docket: 2016-5458(IT)G


Indusol Industrial Control Ltd submitted SR&ED tax credit claims for their 2012 taxation year. Following denial, they filed an appeal with the Court. The claim pertained to their “Draught (draft) Information System” or DIS. The initial denial was based on the basis that their project did not meet the criteria of subsection 248(1) of the Act. 

This appeal sought to verify whether the activities qualified as SR&ED, and whether the expenses, which totalled $111,883, are deductible under section 37 as SR&ED expenditures. It further looked at whether those expenditures would be qualified for calculations of the ITC under subsection 127(5).

The expenses were pulled from:

  • Salary: $104578
  • Supplies (portable computer): $3,901
  • Licence (microsoft Developer Network platform): $3,404

Basic Facts

Subsection 248(1)

Scientific research and experimental development means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis including:

  • Basic research undertaken for the advancement of scientific knowledge without a practical application
  • Applied research undertaken for the advancement of scientific knowledge with a practical application
  • Experimental development undertaken for the purpose of achieving technological advancement 

Section 37

Section 37(1) says that any expenditures in respect to SR&ED do not fall under Sections 30-36. 37 looks at non-capital, non-personal expenditures that were incurred in the relevant tax year. See an extensive list of allowable and non-allowable expenses here.

Subsection 127(5)

A deduction from the tax may be made but not in excess of the total of the taxpayer’s investment tax credit at the end of the year, or their SR&ED qualified expenditure pool (whichever is lesser).

The DIS project

DIS was developed as an aid to navigation that provides real-time graphical representation of anticipated underwater obstacles and conditions for a vessel. Developed to address ship dynamics, channel dynamics and behaviour of the vessel; the system can provide real-time data and calculations such as distance between the bottom of the vessel and the bottom of the channel. Before the DIS, there was no real-time information like this available. 

Court Decision

Throughout the appeal process, both sides of the court looked into the 5 part SR&ED test, looking to see if there was technological uncertainty and if a systematic process of experimentation was used to overcome it. They found that regardless of what Indusol presented, they lacked documentation and evidence to show that they had a logical and systematic approach to overcome uncertainties. For instance, the narrative and timeline suggested that Indusol was requested to conduct testing on board vessels but had no information on what tests were actually carried out. 

Another issue was found in the substantiation of their expenditures. For instance, the salary of one staff member was part of the claim but her activities included testing and experimentation as well as proof reading and driving to vessels. These latter activities are not qualifying expenses. Unfortunately, they did not have any supporting documentation that helps to show how much time this staff member actually devoted to different activities and so there is no way to be sure how much time was spent on SR&ED. This same lack of evidence or documentation was a persistent problem throughout the claim.

The Court ultimately concluded that the activities do not constitute SR&ED. Further, they determined the expenses claimed are not deductible under section 37 and are therefore not QREs under subsection 127(5).


From this case we see the importance of documentation to prove your claims. Indusol failed to sufficiently support their expenditures and their connection to the alleged SR&ED. Further, they couldn’t demonstrate how their activities met the 5 part test. As important as the actual occurrence of your activities are – the claim cannot be approved without direct proof. We’re talking about detailed outlines of tests conducted, the results, and thought process behind next steps. SR&ED must be a logical process of experimentation in order to qualify. So keep track, show records, and make sure they outline the path you took. This documentation clause extends to the expenditures as well. So track what activities staff are doing and keep records of how much time goes into SR&ED. Do the same with your supplies and computer softwares. We know it seems like a lot, but in the end it is worth it.

Click here to read the full case.

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If you would like to find out more about how your business could benefit from R&D Tax Credit, contact a Swanson Reed R&D Tax Advisor today.

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