TaxMatters@EY – December 2016

Software SR&ED credits:
what evidence is sufficient evidence?

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ACSIS EHR (Electronic Health Record) Inc. v The Queen, 2015 TCC 263
Rachel Robert, Montreal, and Allison Blackler, Vancouver

This case considered whether a taxpayer was entitled to claim scientific research and experimental development (SR&ED) investment tax credits under the Income Tax Act (the Act) in relation to a computer software development project. The Tax Court of Canada (TCC) ruled in favour of the taxpayer and allowed the SR&ED investments tax credits claimed.


The taxpayer operates a business that develops specialized software, including, in particular, software applications for the centralized management of national, regional and local health care sectors. In 2014, the taxpayer entered into a contract with a foreign governmental authority to implement a national health care system.

Early on in the project, the taxpayer realized that major issues needed to be addressed due to the foreign country’s unstable communications infrastructure. The taxpayer determined that the only way to carry out the contract would be to create a new technology that could mimic a stable system.

The taxpayer claimed the expenditures related to developing that new technology as qualifying SR&ED expenditures. However, the Canada Revenue Agency (CRA) took the position that the work performed did not meet the definition of SR&ED, as the activities did not resolve any scientific or technical uncertainties.

The Tax Court of Canada decision

At issue in this case was whether the software project was “scientific research and experimental development… that was undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto”[1], and if so, whether any of the particular expenditures could be considered a “qualified expenditure” (subsection 127(9) of the Act).

In order to make that determination, the TCC applied the five criteria, set out in the landmark case Northwest Hydraulic Consultants Ltd. v The Queen, 98 DTC 1839, for determining whether a taxpayer’s activities are SR&ED:

  • Is there a technical risk or uncertainty?
  • Did the taxpayer formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
  • Did the procedures adopted by the taxpayer accord with established and objective principles of scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?
  • Did the process result in a technological advance, that is to say an advancement in the general understanding?
  • Was a detailed record of the hypotheses, tests and results kept as the work progressed?

Applying these criteria, and based on an assessment of the evidence at trial, the TCC determined that the taxpayer’s software system was in fact a technological advancement that addressed a technological uncertainty. The TCC determined that the taxpayer would not have had a reasonable expectation of success with the project as a whole, unless new technological knowledge could be developed to address the infrastructure issues. The TCC concluded that it was reasonable for the taxpayer to determine that the uncertainties could not be resolved using standard procedures.

The TCC also considered the methodology adopted by the taxpayer and whether the scientific method applies differently in the context of software development versus other scientific fields. The TCC observed that software development tests may take many forms and can be executed thousands of times, making it difficult to keep records for every test conducted. However, the TCC ruled that even though the recordkeeping in the context of software development may be different from other scientific fields, it still constituted scientific method. The TCC concluded that in this case, the taxpayer did indeed adopt principles of scientific method since it systematically formulated and tested hypotheses to address the technological uncertainties that it encountered.

Perhaps most important, and consistent with a recent line of SR&ED cases (e.g., Les abeilles service de conditionement inc. v The Queen, 2014 TCC 313, and 6379249 Canada Inc. v The Queen, 2015 TCC 77), the TCC reiterated that there is no legislation requiring contemporaneous documentation to justify the deduction of expenses. The TCC concluded that the documentation and the witnesses’ testimonies in this case were together sufficient to support the SR&ED claim.

As a result, the TCC allowed the taxpayer’s appeal. In addition, the taxpayer applied for enhanced costs and won (2016 DTC 1047).

Lessons learned

Quality contemporaneous documentation is always a taxpayer’s best defence to an SR&ED challenge by the CRA. However, this case is an important reminder that it is still possible for a taxpayer to support its claim by a combination of documentation and effective oral testimony.

  •  1.  Paragraph (c) of the definition of “scientific research and experimental development in subsection 248(1) of the Act.