TCC Sets New Bar for SR&ED Supporting Documentation: Advocacy Alert
June 17, 2015

On 8-Jun-2015 Justice Randall S. Bocock of the TCC in Edmonton upheld CRA assessments whereby software as service provider Highweb & Page Group Inc. was denied SR&ED ITCs on R&D expenditures of $25K in TY 2007 and $38K in TY 2008. This denial amounted to Highweb’s entire claim for TY 2007 and about 85% of its claim for TY 2008. The claims pertained to development of software that provides a suite of web-based business process services. The claimed work in TY2007 was mainly aimed at making an existing system “portable” across multiple software platforms using a J# code base; in TY2008 there was additional work on investigating differences in data mapping in .NET and J#. Appendix 1 of the ruling (which occupies 11 or 22 pages) provides some interesting insights into CRA’s thinking with respect to what constitutes “technological advancement” in the context of commercial software applications. CRA ruled that the only aspect of the work (about 10%) that qualified as SR&ED pertained to development of code to provide data mapping of QueryBeans between .NET and Java. The remaining 90% of the work consisted of applying the techniques that a trained IT professional would perform under the same circumstances i.e. writing code within the limits of the software. The only work CRA assessed as eligible is highlighted in bold type on page 8 of Appendix 1 (pdf page 18). At item [19] of the ruling, the court rejected the argument of “system level uncertainty” that is so often cited in support of claims for software development on grounds that: “The Appellant did not tender sufficient concurrent documentation or records to show that the challenge of system and internet incompatibility (beyond STA2 - Phase II) was analyzed sufficiently to establish a need for technological experiments or investigation”.
In items [18] & [19], two new terms are introduced into the lexicon of SR&ED terminology: “knowledge gap” and “technological gap” which have not been seen before and may well find their way into future editions of CRA policy documents. Unlike the now banished term “technological obstacles” which had no basis anywhere, CRA could point to this ruling as justifying their use.
However the ruling is most severe with respect to setting an elevated requirement for technical supporting documentation to corroborate the claimed work. To paraphrase Justice Bocock’s writing at item [23]: although it may well be that some incremental technological uncertainty and technological advancement occurred, there was “manifest disregard and non-compliance with the essential and well-known procedural requirements of the scientific method and its fundamental requirement for detailed and current recordkeeping in order to document the technological uncertainty, the hypotheses, the experiments, the results, and achievements.”
This statement on record keeping at item 23 is more explicit (and restrictive) than any existing. Extant jurisprudence generally leaves the door open a crack with phrasing such as appears in item [28] of Zeuter Development (TCC 2006) which reads the “only reliable method of demonstrating that scientific research was undertaken in a systematic fashion is to produce documentary evidence”: The Highweb ruling omits the escape clause “only reliable” which has allowed the court to accept oral testimony of a “credible witness” in the absence of documents as supported a taxpayer win on both science and delivery of tax forms in 6379249 Canada Inc. (March 2015).
Fortunately this is a ruling under the Tax Court's Informal Procedure so technically it sets no precedent. However, it contains many new phrases that may well turn up in future general procedure rulings which will set precedents. And as of this writing there are some 75 or so pending SR&ED cases in which tax court jurists will have the opportunity to do so.

Read the full ruling here: