Tax Court of Canada's perspective on SR&ED eligibility criteria
The Tax Court of Canada recently ruled in favour of Les Abeilles with respect to a SR&ED claim denied by CRA. We thought the decision was worth highlighting, and expect that this ruling will impact how CRA will test SR&ED eligibility going forward.
The case came to trial in July 2013 after CRA rejected the claim on grounds that none of the claimed work met the definition of SR&ED eligibility: the work undertaken was standard practice and/or routine engineering with no technological uncertainty, no technological advancement nor any systematic investigation. CRA also cited a lack of contemporaneous documentation to corroborate the claimed work.
On October 23, 2014, Justice Gaston Jorré allowed an appeal to the Tax Court of Canada (TCC) made by Abeilles Service de Conditionnement Inc. Abeilles is located in the east end of Montreal and is 49% owned by General Electric. The company manufactures electric motors and other component subassemblies such as heating elements, control panels etc. used in household appliances.
The following three rulings by the judge are contrary to the usual stance taken by CRA to reject a claim.
Technological Advancement: The Court ruled that research does not have to lead to technological progress for it to be SR&ED. Work undertaken in the interest of technological progress, even if it fails, can still qualify. Additionally, increasing the productivity and flexibility of a process can constitute technological advancement. In determining whether there has been experimental development, the Court stated that one must consider the project as a whole rather than looking at each individual test or step separately. This ruling contrasts with the approach taken by CRA.
Technological Uncertainty: Criteria of technological uncertainty can be met by the taxpayer not knowing how to achieve some goal that is very specific to its situation. This is a clear distinction from the statement "Technological uncertainties may arise from shortcomings or limitations of the current state of technology that prevent a new or improved capability from being developed. It is the "no shortcomings or limitations of the current state of technology" reasoning that CRA auditors all too frequently cite in their assessments.
Other findings of note with respect to eligibility are as follows:
Increases in productivity rate and flexibility of the process are acknowledged to constitute a "technological advancement".
Projects should be assessed as a whole and across multiple years, not "de-constructed" until no eligibility remains.
A diligent search by the taxpayer that shows a lack of information public domain with respect to how to achieve the outcome sought in the project, is adequate evidence of "technical uncertainty".
The need to develop a commercially viable (i.e. cost effective solution) can be a factor of technological uncertainty with respect to SR&ED eligibility.
Adjusting a manufacturing process can constitute "systematic investigation".
Technological progress in the manufacturing process equates to "advancement".
The requirement to develop a cost effective solution was a practical factor with respect to the criteria of technological advancement and technological uncertainty.
While contemporaneous documents are needed to corroborate the occurrence of SR&ED, those documents need not have special content relating to SR&ED; it is sufficient to be able to cross link the work claimed to the timeframe of the claims.
The last part of the ruling would be interest to claimants familiar with the SR&ED audit process. CRA often uses internal staff as expert witnesses in court, including using the same staff members who denied the claim in question. In this case, the Court ruled that the CRA staff member appeared to be guided by CRA guidelines, including certain standards for proving facts which were not appropriate in his role as expert witness. The court found that the Crown's expert (a CRA employee) was not sufficiently impartial after the taxpayer objected that the he was not "independent". The court observed the expert's "confusion" between his duty to uphold the very CRA administrative policies that formed the basis of the original assessment and his role at court which is to "clarify" technical evidence so that the court can make its decision.
The Milton Education Village (MEV) Innovation Centre is just completing its first fiscal year. With a soft opening in April, we became fully functional in September with the completion of Phase 2 of our construction. Over the fall we have seen interest in the facility grow with companies using our coworking space and leasing small flexible offices geared toward technology intensive firms.
Our board rooms and meeting spaces are also proving to be quite popular and Wilfrid Laurier University has begun to hold lectures in its class room space.
Much of our early efforts have focused on communicating what the MEV Innovation Centre has to offer to the technology and small business community. We have not spent as much time talking about WHY we are doing this.
Simply put, Milton can’t rely on the type of economic growth we’ve seen during the last decade continuing. Given its location in the GTA, Milton has been very successful in attracting logistics operations and the large scale, and land consuming, facilities that they use. We are not complaining. This tax and assessment growth has allowed us to achieve a level of fiscal balance and the ability to provide the services needed to take care of the Town’s rapidly growing population.
However, the supply of land is not endless and we expect the majority of large sites to be used up over the next ten years. That’s why we are asking ourselves, “what next?”. Better to be thinking about this now than scrambling for an answer in 2024.
This takes us to what we are calling our hidden economy. It has two parts. First, Milton’s population is on average, the youngest in the GTA with an average age of 34 years. It is also highly educated and over 40 percent of the work force is employed in professional and technical occupations. This is a talent pool teaming with entrepreneurship. We estimate that there are already over 3,000 “home based” businesses in town.
Equally important, is the emergence of the Professional/Scientific/Technical sector as a driver of local economic growth. This sector created the most new companies, about 400, over the last five years.
A significant proportion of the companies in the sector are in the computer/systems design and engineering industries. Currently, there are about 1,200 small companies employing about 2,200 people.
We believe that building a more diverse economy will be driven to a large extent by entrepreneurship and the continuing growth of value-added service companies and jobs. The MEV Innovation Centre’s facilities, existing and future entrepreneurship programming is dedicated to achieving this objective.
About the Member Blogger
As tech companies, and especially startups, we seem to be constantly searching for places to ‘hang our hats’. We’re all more than comfortable working ‘virtually’, but we also know that there’s nothing like a face-to-face meeting with clients or investors when the time comes.
At NEXED we’ve been lucky to be able to use a beautiful café in Bronte – Taste of Colombia – to host many events, demos and meetings. The café recently expanded and now offers an events room adjacent to it. It’s 850sq.ft with space for up to 60 people, wifi throughout, access to a digital projector and sound system, tables and chairs that can be arranged as you need them and free parking. And of course, having a café right beside you has benefits that don’t need to be spelled out.
Currently, Taste of Colombia is offering the space at a reduced rate for SH members. To book an event please contact Yurry Wu at 289.837.2031. And stay tuned for updates about a new SH meetup group on Fridays at the café - TGIF Tech. The first is scheduled for November 28th- 3-5pm. More details coming soon!
Sometimes a more formal and intimate atmosphere is required. Carolyn Moshtagh of AXXYR, also located in Bronte, is offering her boardroom to SH members who are looking for a quiet place for smaller meetings. Again, with access to whatever you may need to meet, demo and discuss. Contact Carolyn at 416.500.9195 to set up a time.
So if you need to get out and about, these are two great locations in Bronte for SH members to call home- at least for a couple hours!
Wikipedia defines Open Data as “The rationale behind open government data can be considered as twofold.
First, advocates contend that making government data available to the public in open formats increases government transparency and accountability.
Second, open data should enable third parties to leverage the potential of government data through the development of applications and services that address public and private demands.”
One example, in lay terms, imagine all the political donations being readily available to everyone in an Excel formatted file. You didn’t need to submit a request, or drive to town hall, but rather, required access to an unrestricted web page. If you’re proficient with Excel, what information could you derive from that data?
A parallel can be drawn against Open Source software, and how that model has revolutionized the computing ecosystem. The most popular open source products run ecommerce sites of some of the world's largest online retailers. In all probability, your company is also using Open Source products.
Why is Open Data useful?
To continue quoting Wikipedia, “The best open government applications seek to empower citizens, to help small businesses, or to create value in some other positive, constructive way.”
The massive amounts of data our government have collected is ours. The vast majority of it however is unavailable to us. Understandable for data containing personal or security information, but no longer acceptable for the rest.
Where can I Find the Open Data?
Here are some examples of Canadian sources of Open Data:
During a May 2014 Edmonton Open Data Hackathon, a citizen produced this City of Edmonton budget visualization (infographic). Their Mayor was later quoted “I’ve dealt with seven budgets … (this visualization was) very very helpful for me to understand our budgets through the eyes of a citizen”
Imagine leading or being witness to the genesis of some bold new commercial or open source app that brings life changing possibilities?
On September 9, 2014, join a intensive highly engaged round-table workshop with your peers. You’re in control. You can share and brainstorm on your challenges, your needs, and your ideas around citizen centric services and apps that require open data. Learn more here, or Register here.
About the Blogger
Rick Stomphorst is the President of SearchVelocity, providing recruitment services to technology companies to identify and acquire high-value technology staff. Rick is a technology leader with over 25 years experience with SaaS & on-premise software, large IT professional consulting firms and five software start-ups. He is a cofounder of Silicon Halton. [@StompR]