One of the most important criteria of a SR&ED claim is supporting documentation, i.e. tangible evidence. This is the case even though the legislation does not mandate such documentation and the case law gives considerable authority to oral evidence. We understand why the CRA requires some documentary evidence to support an SR&ED claim, however there sometimes is a divergence between what CRA and the Tax Court of Canada considers sufficient.

The Research and Technology Officer (“RTA”) auditing a claim is unlikely to give as much deference to oral testimony as a Tax Court judge; the latter being acutely aware of the rules of evidence. In fact, despite the case law to the contrary some RTA’s continue to insist on very stringent documentary evidence and at times in a particular format. A few key Tax Court decisions stand for the proposition that less than perfect documentary evidence combined with credible oral evidence is sufficient to prove SR&ED.

Most recently, in the ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2015 TCC 263 (CanLII), at paragraph 39, Justice Campbell stated:

While it will always be preferable that an appellant maintain contemporaneous documents to support its systematic investigative procedures and methods, as noted by Justice D’Auray in 6379249 Canada Inc. v The Queen, 2015 TCC 77 (CanLII), [2015] TCJ No. 62, at paragraphs 71, 72 and 92, the Act contains no legislative requirement to file those documents in order to qualify for the deduction of expenditures. Justice Jorré in Les Abeilles Service de Conditionnement Inc. v The Queen, 2014 CCI 313 (CanLII), 2014 DTC 1219, made a similar observation and Justice Archambault in 116736 Canada Inc. v The Queen, 98 DTC 1816, at paragraph 41, stated:

[41] However, the Act and the Regulations do not require that such written reports be produced in order for a taxpayer to qualify for the deduction of such expenditures: it is possible to adduce evidence by way of oral testimony. Whether the Minister or a judge could conclude that the activities purported to have been carried out by the taxpayer were actually carried out then becomes a question of credibility.

ACSIS is a general procedure decision, therefore it has precedential value. In contrast, a recent informal procedure decision (officially no precedential value) held that documentary evidence was key. In Highweb & Page Group Inc. v. The Queen, 2015 TCC 137 (CanLII), Justice Bocock appears to disregard the previous jurisprudence and advances a CRA-like standard regarding documentary evidence. According to Justice Bocock, at paragraph 22:

While evidence of the outcome is important, it is critical to technological advancement that the rigours of adherence to the scientific and experimental method be kept on a detailed and concurrent basis with the conduct of the experiments. Since a negative answer to the hypothesis is a more frequent outcome and frequently as helpful in advancing technological knowledge, detailed step-by-step logging, analysis, and measurement is a mandatory requirement, not an optional addendum. It is the roadmap. If one loses the way and failure results, retracing through these accurate records provides one with the deductive process for developing a different direction, speed or mode to create, locate, size, and arrange the “missing piece in the puzzle”. The “only reliable method of demonstrating that scientific research was undertaken in a systematic fashion is to produce documentary evidence”: Zeuter Development at paragraph 28.

It is unclear how weak the documentary evidence was in Highweb. Nevertheless, Justice Bocock is stating that documentary evidence is key while Justice Campbell, in line with the majority of the case law, holds that combined documentary and credible oral evidence is sufficient, and CRA policy appears to agree with Justice Campbell.

According to section 5.6.6.2 of the Claim Review Manual for Research and Technology Advisors (Oral information/ interviews with claimants) documentary evidence can be strengthened by supporting and credible oral evidence and “RTAs should consider the oral information provided along with other evidence that the claimant provided…”

Ultimately, as Justice Campbell states at paragraph 40 of ACSIS:

This is not to say that taxpayers should ignore detailed record keeping. Such documentary evidence is always to be preferred and each case will vary in respect to how the evidence will be viewed. Taxpayers who come to court without proper documentation will always remain in the unenviable position of persuading a court that systematic investigation did occur.

CrossDynamix does not recommend that claimants rely on the leading case law when considering the documentary evidence required to support a SR&ED claim. In fact, we highly recommend that claimants make supporting documentation a priority and keep this concern at the forefront throughout their SR&ED projects.

Accordingly, we work with clients to ensure an adequate level of documentary evidence is maintained and we are expert at identifying contemporaneous documentation to support your SR&ED claim. If the RTA claims your SR&ED claim is not properly evidenced we can work with you to compile evidence that accrued during the project, e.g. emails, project planning documents, meeting minutes, etc., and negotiate with the RTA to advance your position.