Case National R&D Inc. v. The Queen (2020)

National R&D Inc. v. The Queen, the Tax Court of Canada examined the eligibility of a software development project for a Project Tracking System (PTS) under the Scientific Research and Experimental Development (SR&ED) tax credit program. The case provides critical insights into the importance of maintaining detailed records and demonstrating a systematic investigation in accordance with the scientific method to substantiate SR&ED claims

The Case Overview

National R&D Inc. developed a PTS to automate portions of filing SR&ED claims. The Canada Revenue Agency (CRA) disallowed the company's SR&ED claim, arguing that the activities did not meet the criteria set out in subsection 248(1) of the Income Tax Act. The court's decision hinged on whether National R&D Inc. could demonstrate that their activities constituted SR&ED, specifically focusing on the need for detailed records and systematic investigation.

Importance of Detailed Records

One of the key takeaways from the case is the necessity of maintaining comprehensive and contemporaneous documentation. The court emphasized that detailed records of hypotheses, tests, and results are crucial for substantiating SR&ED claims. These records should include:

• Formulation of Hypotheses: Clearly defined hypotheses aimed at resolving technological uncertainties.
• Testing and Experimentation: Detailed accounts of experiments conducted, including methodologies, observations, and results.
• ‍Modification of Hypotheses: Documentation of how hypotheses were tested, modified, or rejected based on experimental results.

In National R&D Inc. v. The Queen, the court found that the company's documentation was insufficient. The Project Timeline and other documents provided were vague and lacked the necessary detail to demonstrate a logical progression of tests and modifications. This lack of detailed records ultimately led to the disallowance of the SR&ED claim

Systematic Investigation and the Scientific Method

The case also underscores the importance of demonstrating a systematic investigation in accordance with the scientific method. The court outlined five criteria for determining whether an activity qualifies as SR&ED:

• ‍Technological Uncertainty: The presence of technological uncertainties that cannot be resolved by routine engineering or standard procedures.
• ‍Formulation of Hypotheses: Hypotheses specifically aimed at reducing or eliminating the technological uncertainties.
• ‍Systematic Testing: Adoption of the scientific method, characterized by systematic observation, measurement, and experimentation.
• ‍Technological Advancement: The process must result in a technological advancement, even if the hypothesis is ultimately rejected.
• ‍Detailed Records: Keeping detailed records of the hypotheses, tests, and results as the work progresses.

In the case, the court found that National R&D Inc. failed to demonstrate a systematic investigation. The company's documentation did not show a logical progression of tests or the modification of hypotheses based on empirical evidence. This failure to adhere to the scientific method was a significant factor in the court's decision to disallow the SR&ED claim.

How Fiszman Tax Law Can Assist

Navigating the complexities of SR&ED claims can be challenging, but Fiszman Tax Law is here to help. Our firm offers comprehensive services to ensure that your SR&ED claims meet the CRA's stringent requirements:

• ‍Expert Analysis and Testimony: Our team of experts can provide detailed analysis and testimony to support your SR&ED claims, ensuring that all necessary documentation and evidence are in place.
• ‍Representation in Appeals and Reassessments: If your SR&ED claim is disallowed, we can represent you in appeals and reassessments, leveraging our extensive experience in tax litigation to achieve the best possible outcome.
• ‍Securing Approvals for Future Claims: We work with clients to develop robust documentation practices and systematic investigation methodologies, helping to secure approvals for future SR&ED claims.

THE INFORMATION PROVIDED IN THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. FISZMAN TAX LAW RECOMMENDS CONSULTING A QUALIFIED LAWYER FOR ADVICE PERTAINING TO YOUR SPECIFIC SITUATION.