This month the Department of Finance Canada issued multiple proposed changes to the Income Tax Act  (ITA) in relation to SR&ED. The most notable is the proposed amendment to ITA s. 37(8)(a)(ii)(B), effectively limiting the scope of eligible SR&ED expenditures. The following is a brief outline of that change. Additional proposed changes will be discussed in future posts.

In Feedlot Health Management Services Ltd. v. The Queen, 2015 TCC 32 (CanLII) [1] the issue was whether the disputed expenditures qualified for deduction under the proxy method in  s. 37(8)(a)(ii)(B)  of the ITA. Expenditures claimed through the proxy method are limited to those outlined in the aforementioned provision. In Feedlot the appellant sought to convince the Tax Court of Canada that the expenditures were valid because they fell under s. 37(8)(a)(ii)(B)(II), “an  expenditure  in  respect  of  the  prosecution  of  scientific research    and   experimental   development   in   Canada   directly undertaken  on behalf  of the  taxpayer...”

The key question was the scope of “in respect of”. The Court concluded that the expenditures were not SR&ED because of the commercial exclusion in paragraph in subsection 248(1)(i) of the ITA definition of SR&ED. However, "in respect of" was broad enough to include the disputed expenditures for SR&ED calculation purposes. According to the Department of Finance's explanatory notes to the proposed changes: the "case law has established that the phrase “in respect of” has the broadest meaning possible. However, this is not the tax policy intent in respect of expenditures described in subclause 37(8)(a)(ii)(B)(II)..." [2]

Accordingly, the Department of Finance has proposed amending s. 37(8)(a)(ii)(B)(II) to remove “in respect of” and replace with "for scientific research and experimental development", effectively narrowing the scope of the provision in contrast to the Feedlot decision.

CrossDynamix is the industry leader in filing and defending SR&ED claims as well as appealing the CRA's SR&ED assessments.

1.            http://canlii.ca/t/gg9tx

2.            https://www.fin.gc.ca/drleg-apl/2016/ita-lir-0916-n-eng.asp