Windsor Clinical Research Inc. v. The King (2023)

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Windsor Clinical Research Inc. v. The King
(2023)

 Key Lessons / Points

  • This case illustrated the strict adherence to the Income Tax Act all SR&ED related claims and cases must follow even during the appeals and court process.
  • To be eligible for the SR&ED tax credit, work performed must address a scientific or technological uncertainty with the goal of increasing your company’s knowledge base relative to its state prior to the project and above the overall industry’s knowledge base through scientific or technological advancement.
    • A project must meet all the criteria laid out in the “five questions” to be eligible for SR&ED.
  • Review the CRA’s SR&ED Glossary prior to completing an SR&ED application as the language of the definitions is particular in nature. Familiarity with key terms such as knowledge base, scientific and technological uncertainty, scientific and technological advancement, and experimental development is highly beneficial. 

*Note* Subsection 152(9) of the Act:

At any time after the normal reassessment period, the Minister may advance an alternative basis or argument — including that all or any portion of the income to which an amount relates was from a different source — in support of all or any portion of the total amount determined on assessment to be payable or remittable by a taxpayer under this Act unless, on an appeal under this Act

(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and

(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.1

Fiscal Years in Question 

2017, 2019

Court Heard In 

Tax Court of Canada (Ottawa, Canada)

Dates Heard

December 22, 2023

Length of Process

5 years

Neutral Citation 

2023 TCC 179

Docket 

2021-742(IT)G & 2021-1678(IT)G

Amount Under Dispute 

Not specified

Decision 

IT IS ORDERED THAT:

  1. The Respondent may file the Amended Replies to the Notices of Appeal filed with its Motion Records in appeals 2021-742(IT)G & 2021-1678(IT)G.
  2. Costs in respect of the Motions will be in the cause.

[28] In this case, based on the pleadings, the foundation or main constitution element of the assessment is that certain activities do not constitute scientific research or experimental development within the meaning of the Income Tax Act. The proposed amendments involve adding factual allegations in support of that. The proposed amendments do not constitute a new or additional basis of assessment.

[29] As a result there is no need to turn to subsection 152(9) of the Income Tax Act

Summary 

In this case, the Appellant, Windsor Clinical Research Inc., filed scientific research and experimental development (SR&ED) claims for 2017 and 2019. The Canada Revenue Agency (CRA) assessed that parts of the projects did not qualify as SR&ED as they did not meet the requirements in the definition of the Income Tax Act. The proposed amendments to the 2017 claim to add factual information for Projects 1 and 5 alleging it was in the field of psychology versus dermatology and the work was not conducted in support of research in dermatology.  The judge conducted a two part analysis in his decision. First, he examined “when in civil litigation is it appropriate to allow an amendment?”. Citing a decision from the Federal Court of Appeal that ruled an amendment should be allowed at any stage if it assists in determining the real questions between the parties, would not result in an injustice, and would serve in the interest of justice. The judge ruled that the Appellant was not seeking any alternative such as further discovery and allowed the motion. Second, the judge examined, “are there specific tax litigation considerations limiting how the Respondent may defend an appeal?”. The judge ruled that on an appeal from an assessment, it is precedence to have a trial of issues and that the ultimate issue here is whether the amount of tax was too high, not the reasoning for the decision. The judge ruled that the principle of the assessment was that the activities did not meet the requirements of SR&ED within the Income Tax Act. He also ruled that the amendments do not create a new or additional basis of assessment.

Key Excerpts 

[1] The Respondent has filed motions for an order granting leave of the Court to file the Amended Replies to the Notices of Appeal in each of these appeals, pursuant to section 54 of the Rules.

[5] The proposed amendments in respect of the 2017 year appeal add some factual allegations at proposed paragraph 28: i) that, with respect to second part of part of Project 1 and with respect to Project 5, the work conducted was in the field of psychology rather than dermatology and ii) that the work was not completed in support of research in dermatology.

[6] In the grounds relied on section (Part C) of the proposed amended reply there are corresponding amendments adding submissions relating to the additional factual allegations and the definition of scientific research and experimental development in subsection 248(1) of the Act.

[7] The proposed amendments in respect of the 2019 taxation year are not substantially different in any respect that matters for the purpose of the motion. The analysis below is equally applicable to both appeals.

[9] The first relates to the question: when in civil litigation is it appropriate to allow an amendment? This first issue was not raised by the appellant in opposition to the motion and so I will deal with it very briefly.

[10] The principle is summarized in the following quotation from the decision of the Federal Court of Appeal in Canada v. Pomeroy Acquireco Ltd:

[…] The controlling principle is that an amendment should be allowed at any stage of an action if it assists in determining the real questions in controversy between the parties, provided it would not result in an injustice not compensable in costs and that it would serve the interests of justice. A court should give significant consideration to amendments which further the ability of the trial court to determine the questions in controversy … (Citations omitted.)

[12] The Appellant, apart from opposing the amendment, is not seeking any alternative remedy such as further discovery, if the motion is allowed.

[13] In terms of this first question there is no injustice or prejudice to the Appellant. The amendments allow fuller examination of the controversy.

[14] This second aspect is this: are there specific tax litigation considerations limiting how the Respondent may defend an appeal? Considerations that may constrain amendments that are otherwise permissible under the general rules of civil litigation.

[15] The essence of the Appellant’s objection to the amendments is that they would deprive the Appellant of its right to rely on the specific approach taken by the auditors and appeal officers.

[16] Among other things, in its submissions the Respondent invoked subsection 152(9) of the Income Tax Act. I shall come back to that subsection. There are other matters that must be considered first.

[18] It is well established that on an appeal from an assessment there is a normal trial of the issues. The hearing in this court is not some form of judicial review.

[19] It is also clear that the ultimate issue on an appeal is: whether the amount of tax is too high, not the process or reasoning by which it was reached? It is also well settled that the Court can not increase the amount of tax assessed.

[28] In this case, based on the pleadings, the foundation or main constitution element of the assessment is that certain activities do not constitute scientific research or experimental development within the meaning of the Income Tax Act. The proposed amendments involve adding factual allegations in support of that. The proposed amendments do not constitute a new or additional basis of assessment.

[29] As a result there is no need to turn to subsection 152(9) of the Income Tax Act

Link to Full Ruling 

View the full report here. 

Related Ruling

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