Facts:
The appellant (Jentel) develops and manufactures engineered thermoformed plastic products. In previous fiscal years, Jentel had developed Multi-Bins, a small-parts storage system.
The SR&ED work in question aimed to improve the existing product with respect to: size, weight, load, modularity & fastening methods. Jentel grouped the work into four SR&ED “activities”:
Bin Front and Back Panels
Tested “various” molding conditions
using 8 different plastic materials then
tested 2 plastics re. thickness vs. strength
Stands
Built prototypes using combinations of wood, plastic & aluminum
Load tests showed aluminum best
Sliders
Tested “various” shapes and forms of sliders
None worked satisfactorily
Dividers
Performed tests to mold a groove in the front panel
Including 3 molds, each of different casting material &
“many” different groove designs
All failed to meet consistency
In respect to this work both sides agreed that:
– “Contemporaneous records of this work were kept &
– the work was performed in a systematic manner.”
Issue(s):
Whether the work constituted SR&ED, as that term is defined in subsection 248(1) of the Income Tax Act (the “Act”).
The CRA argued that the “Appellant failed to demonstrate a systematic investigation through experiment or analysis performed to resolve any scientific or technical uncertainties.”
Relevant legislation
Income tax act
SR&ED is defined for income tax purposes, as follows:
“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 and that is
(a) basic research..,
(b) applied research,.. or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,…”
Case law:
CW Agencies: In this case the judged noted,
“Five criteria have been used by the Courts to assist in determining whether a particular activity constitutes SR&ED … (in C.W Agencies) summarized as follows :
Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses?
Did the process result in a technological advancement?
Was a detailed record of the hypotheses tested, and results kept as the work progressed?
Northwest Hydraulic: “In discussing whether a technological risk or uncertainty existed, Justice Bowman (as he then was) noted the following in the Northwest Hydraulic decision at paragraph 16:
Implicit in the term “technological risk or uncertainty” in this context is the requirement that it be a type of uncertainty that cannot be removed by routine engineering or standard procedures… If the resolution of the problem is reasonably predictable using standard procedure or routine engineering there is no technological uncertainty as used in this context.
What is “routine engineering”? It is this question, (as well as that relating to technological advancement) that appears to have divided the experts more than any other. Briefly it describes techniques, procedures and data that are generally accessible to competent professionals in the field.
Analysis:
Having reviewed the evidence provided by the appellant vs. the clear requirement to illustrate “hypotheses” the judge cited the obvious weaknesses. The claimant provided results (i.e. what worked) rather than conclusions (i.e. why this worked better than the other options).
Ruling & Rationale:
In this case the judged concluded,
“The argument fails for the simple reason that the Appellant did not establish a prima facie case that it was attempting technological advancement.”
Implications & Author’s Commentary:
We hate to say we told you so but our SR&ED newsletter 2010-2 (Technological Advancement Edition) outlined:
– exactly how this scenario would unfold
– if/when the claimant omits ANY of the 5 criteria,
– forming the basis of “technological advancement.”
We propose that,
– typically several specific performance objectives
– will “stack up” to create technology objectives
– that require we put forward hypotheses as to
– the “key variables” effecting the outcome.
Perhaps this case lacked sufficient technical specificity?
Resources NOT cited:
CRA’s “Plastics Guidance Document” provides 18 examples of “eligible projects” within the, Plastics Materials, Processing, Equipment & Tool Making industries.
In the author’s opinion this paper provided multiple examples of “hypotheses” which represent “valid” technological uncertainties with this or similar fields of technology.
Re-Write- how this project MIGHT have qualified
Using these examples & concepts we have taken the facts provided in the case and outlined this project under 2 scenarios ( next page):
1) A failing application (i.e. as viewed by the judge) &
2) Recast to eligibility by illustrating,
– “technological advancement” including,
– “hypotheses and conclusions.”