As project did not address technological uncertainty, its expenditures could not constitute scientific research and experimental development

Tax court of Canada | Tax | Income tax | Tax credits

Taxpayer, having entered into energy drink business, undertook research projects to develop beverage with plant sterols and to develop partial hot fill system or dual-chambered bottle. Taxpayer claimed project expenditures as qualified scientific research and experimental development (SR&ED) expenditures and investment tax credits. Minister reassessed taxpayer under Income Tax Act, disallowing claimed SR&ED expenditures. Taxpayer appealed. Appeal dismissed. While there was uncertainty involved in taxpayer’s attempts to develop new product in plant sterols beverage project, main issue of suspending fat-based substance of sterols in liquid was resolved by use of methodology and technology that was well established in food industry. As project did not address technological uncertainty that could not be resolved by routine engineering or standard procedures, its expenditures could not constitute SR&ED. Taxpayer also failed to meet other requirements for qualifying as SR&ED for this project, as no specific hypothesis was formulated, its experimentation was not conducted in accordance with scientific method, and it failed to attain required level of technological advancement. With respect to second project, taxpayer’s current description of it as being partial hot fill system project was inconsistent with information filed with CRA describing dual-chambered bottle project and with other evidence suggesting that partial hot fill system had been developed in years prior. In any event, partial hot fill system developed by taxpayer was not materially different from process widely used in beverage industry at that time, and was designed using standard practices and routine engineering so expenditures related to its development did not qualify as SR&ED. Taxpayer bore burden to establish that project constituted SR&ED and its presentation about this project was so confusing that it was impossible to determine whether it had to do with dual-chambered bottle or partial hot fill system.

Flavor Net Inc. v. The Queen (2017), 2017 CarswellNat 4404, 2017 CarswellNat 9108, 2017 TCC 179, 2017 CCI 179, Johanne D’Auray J. (T.C.C. [Informal Procedure]).

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