Sticky Criteria for R&D Tax Credits: Chocolate Spread That Didn’t Qualify

R&D Pro-Innovation Inc. v The Queen (2015 TCC 186)

Lucrative tax credits for scientific research and experimental development (SR&ED) are available to manufacturers, innovators and inventors, but the research or activities must truly contribute to scientific or technological advancement in some way.  The evidence didn’t stick in a recent case involving chocolate spread.

The project in question was aimed at developing a cold-tempered chocolate spread with cream and maple syrup, without artificial ingredients or added preservatives. The goal was to develop a product that would have a minimum shelf life of three months without artificial additives.

But despite the fact that testing can be methodical and systematic and create novelty or innovation in a product, it can still be insufficient to satisfy the criteria for technological advancement in order to qualify for the SR&ED tax credit.

In SR&ED cases, the appellant has the burden of showing, among other things, that the research involved “technological risk or uncertainty that could not be removed by routine engineering or standard procedures.” This was the crux of the analysis in this case. Essentially, there is no technological uncertainty if competent professionals in the field can resolve the issues with predictability. Witness testimony was also key in this trial at the Tax Court of Canada.

At issue in R&D Pro-Innovation Inc. v The Queen, was whether the SR&ED credits claimed by the taxpayer in its 2009 and 2010 taxation years were properly denied. Mr. Remon testified for the appellant and told the Court that the standard crystallization curves for chocolate are well known, but unknown when ingredients such as cream and maple syrup are added. He also testified that all commercial spreads are jarred while hot and that there are no cold-tempered spreads.

The appellant argued that $10,974 for 2009, and $17,204 for the 2010 taxation year were allowable expenditures for SR&ED activities and that the company was entitled to income tax credits (ITC) of $3,841 and $6,021 respectively.

The testimony of the witness for the CRA seemed to persuade the Court, however, in their favor. According to him, there was a mere variation in the concentrations of the ingredients chosen and in the processes, but without raising or addressing specific technological uncertainties.

He also explained in a succinct manner how expenditures properly qualify for SR&ED credits:

“For a research project to be eligible under the SR&ED program, a systematic approach is required; there must be a protocol that contains hypotheses. It is then necessary to conduct tests, obtain results, and analyze the results to then ultimately reach conclusions that confirm the hypothesis or create new hypotheses that will be tested.”

The Court held that the results of the tests being analyzed for the purposes of the SR&ED credits did not contribute to any scientific or technological advancement in the food sector beyond the scope of standard practice. The appeal was, therefore, denied.

The Minister granted the appellant the amount of $15,308 as business expenses instead of allowable SR&ED expenditures for the calculation of the ITC, because the project did not qualify as a SR&ED credit within the meaning of subsection 248(1) of the Income Tax Act.

If you have clients who are hoping to take advantage of SR&ED tax credits, be sure to advise them that there are stringent criteria for how innovative their research and processes actually are, and of the implications of this case.

Greer Jacks practices law in Victoria and contributes to the update of EverGreen Explanatory Notes and the Use of Trusts in Tax and Estate Planning course from Knowledge Bureau.

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