JEC Distributors v. The King
JEC Distributors Inc. v. The King Docket: 2012-4373(IT)G
JEC Distributors Inc., a Tier 2 manufacturer of welding products and technology for the auto industry, claimed SR&ED expenditures in their tax return for their taxation year ending September 30, 2016. This claim included $91,537 in expenditures incurred from 3 different projects. Initially the Minister of National Revenue denied the claim. In the current case, the company is appealing the decision.
Details and Judgement
The case of Northwest Hydraulic Consultants Ltd. v. The Queen is a standard precedent in SR&ED tax cases. This case outlines a 5 part test, each of which must be met to qualify. The Minister of National Revenue’s initial claim denial was on the basis that the claim did not meet the following test:
- Was there technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
The company argued that the case Les Abeillies Service de Conditionnement Inc. v. The Queen suggested that the first test from Northwest Hydraulic was simply one way of determining whether there was technological advancement. The current case then presented R&D Pro-Innovation Inc. v. The Queen which confined Abeillies to its facts, confirming the test set out in Northwest Hydraulic is to be used.
The Court then reviewed all three projects, using three witnesses from the company to provide details. One project involved developing a system of sensors for welding guns to monitor the flow and temperature of cooling water. This would require the use of sensors and software technologies to (a) gather information via sensors and (b) communicate this data to the user’s networks for data analysis. While technological uncertainties were unquestionable, the company failed to prove that these uncertainties could not be removed through routine engineering or standard procedures. For instance, they did not consult with, nor did they explain how they knew, computer engineers could not employ standard networking procedures to connect the sensors to the user’s network, nor that an electrical engineer could propose a routine solution to prevent electric noise from reaching and interfering with the sensors. The company’s expertise is in welding technology, not the above areas. The same process of elimination was used for the second project.
In the third, the company sought to develop a method to prevent sealer buildup on dressing blades by applying an anti-adhesive to the blade. The company ultimately combined an existing anti-adhesive with an existing atomizer and flow rate metre. The Court found that, while the Company had developed a new use for these technologies, they were still existing technologies applied in standard procedural methods and therefore the project did not qualify.
Ultimately the appeal was dismissed, holding up the Ministry of National Revenue’s decision to deny the claim.
The Court ruled in this direction as they felt the Company failed to introduce expert witness testimony to support their technological uncertainty. Given their expertise is in welding, it may have been prudent to either consult with experts in the fields they were facing uncertainty in during their projects or to have expert witnesses in these fields testify on their behalf during the case. If an expert electrician confirmed that a routine solution or standard procedure would not be sufficient, it would have gone a long way in supporting the Company’s claims.
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