National R&D: A Cautionary Tale About Expert Evidence

• Published date: 01 June 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax
• Law Firm: Bennett Jones LLP
• Author: Ms Brynne Harding, David J. Wahl, Ranjan K. Agarwal and Will Sardo (Summer Student)

In its latest SR&ED decision, National R&D Inc v Canada, 2022 FCA 72, the Federal Court of Appeal reminded litigants of the first principles of expert evidence, the rules and requirements that govern it and of the dangers of failing to do so.

Background

The taxpayer, National R&D Inc., had claimed scientific research and experimental development tax credits for certain "applied sciences" work. National appealed to the Tax Court after the Minister of National Revenue denied the credits on reassessment.

The Tax Court considered whether National's work fell within the definition of SR&ED in s. 248(1) of the Income Tax Act as "experimental development." Applying the five-part test from the 1998 case of Northwest Hydraulic Consultants Ltd. v The Queen, [1998] 3 CTC 2520, the Tax Court found that National had not met four of the five SR&ED criteria.

National took particular issue with the Tax Court's finding that its work did not follow the scientific method, as required by the Northwest Hydraulic test, and appealed to the FCA. The FCA dismissed the appeal.

The FCA's Decision

Common Law Tests Interpreting Statutory Provisions

National argued that the Tax Court judge had committed a legal error by relying on the Northwest Hydraulic test. The test departs from the text of the ITA, creating a more stringent standard, among other things, by requiring that projects follow the scientific method. National argued that Northwest Hydraulic gives guidance only, and is not mandatory.

National is not the first taxpayer to advance this argument'it had been considered and rejected by the FCA only a year earlier (in Kam-Press Metal Product Ltd. v Canada, 2021 FCA 88). The FCA forcefully affirmed the 24-year-old Northwest Hydraulic test, saying that National's argument "proceeds on a misunderstanding of the relationship between the courts and legislation." It is Parliament's role to draft statutory language. Defining and applying that language is not a legal error'it is "precisely what courts are required to do."

If a frontal attack on the Northwest Hydraulic test was ever a viable strategy for litigants, National R&D has now foreclosed it.

Admissibility of Expert Evidence

To counter the finding that its work did not follow the scientific method, National tried to tender an expert report at trial that distinguished the "engineering method" from the "scientific method." The report was not admitted.

The FCA dismissed the argument that the Tax Court judge had erred in rejecting...