National Research and Development Inc. v. the Queen
National Research and Development Inc. v. the Queen
2020 TCC 47 Date: 20200707 Docket: 2017-3837(IT)G
Background
National Research & Development (National) is a consulting company that offers services to clients in engineering, information technology, SR&ED tax credits and Ontario interactive digital media tax credits. They filed an SR&ED claim of $68,29 for their 2011 tax year.
Their claim pertained to a project called the “Project Tracking System” (PTS) and was denied as the Minister found it did not meet the definition of SR&ED in subsection 248(1) of the Income Tax Act.
PTS was a computer program developed that would automate portions of filing the SR&ED claims within the CRA. The objective was to develop a web-based, cross-platform and cross-browser framework to track claimable SR&ED projects for National’s clients.
Basic Facts
The Federal Court of Appeal uses a 5-part criterion to assess whether activities qualify as SR&ED.
- Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
- The original audit found that the uncertainties alleged had common solutions and were therefore not qualifying technological uncertainties.
- Throughout the appeal, National showed that the common solutions were not necessarily applicable to their project based on cost limitations and functionality limitations. For instance, their framework did not support common solutions and needed alternatives.
- Therefore, the Court determined that uncertainty was in fact faced.
- Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
- The Court believes that National did formulate hypotheses aimed at reducing the uncertainties.
- Did the procedure adopted accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses?
- It is required for the company to establish that tests were performed and conducted in a systematic fashion
- National submitted a project timeline, letter, source code, and a document titled “Trials to Achieve Sorting & Paging with Set Constraints” (where sorting and paging were a key objective)
- The Court found the timeline quite vague and lacked detail needed to confirm if the formulation, testing, and modification of these hypotheses were carried out.
- Did the process result in a technological advancement?
- The Court agreed that some advancement had been made but not within the definition of SR&ED. These advancements would have to have been made through the removal of uncertainties – of which there were none.
- Was a detailed record of the hypotheses tested, and results kept as the work progressed?
- As stated earlier, while documents were kept and included, they were too vague and uninformative to meet the requirements in part 5.
Court Decision
At a hearing, both parties agreed that should the Court find this qualifies as SR&ED, the total expenditures was $42,284.54. However, this hearing agreement did not come to fruition as the Court found that National failed to show, on a balance of probabilities, that the PTS activity qualified as SR&ED. They were not convinced that a scientific method, including the formulation, testing, and modification of the hypothesis was conducted leading to a technological advancement. As such, the outcome sided against National and confirmed the denial of their SR&ED credits.
Learnings
This case shows the importance of a detailed approach to your SR&ED. Trial and error is not a sufficient approach to qualify as SR&ED under the Act. In fact, the research should follow the scientific method and your documentation must show this in detail. Keeping record of your activities step by step is key to a successful appeal.
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